How You Could Have Made 935 Times Your Investment With Panasonic Manufacturing Malaysia Berhad
March 2, 2020
If a shareholder had bought 1,000 shares in Panasonic Manufacturing Malaysia Berhad (“Panasonic Malaysia”) (KLSE: PANAMY) when it was listed in 1966, and assuming the shareholder had subscribed for its rights issue of 350 shares in 1975 and did not sell any of the company’s shares, he would be holding a total of 19,384 shares (inclusive of 18,034 bonus shares) worth RM742,407 based on the market price of RM38.30 as at 11 June 2019. In addition, he would have received total gross cash dividends of RM520,967 with a capital outlay of RM1,350 only. The dividends received/ receivable and the appreciation in the market value of its shares translates to a remarkable compound annual growth rate (“CAGR”) of 14.5% on the nominal value basis.
(Source: 2019 annual report)
Given such rewarding returns, we will in this
article, take a closer look at the business, management and financial aspects
of the Panasonic Malaysia, to assess whether the company remains a worthwhile
investment going forward.
Panasonic Malaysia operates from two factories
which are Section 15 (SA1 Plant) and Section 23 (SA2 Plant), Shah Alam. The new office building was completely occupied by the end of
January 2019 while the construction at SA2 Plant is expected to be completed by
the year 2020. On the operational front, management has announced the expansion
of a new wing at its SA2 Plant, which is expected to increase production
capacity by 18%. Panasonic Malaysia plans to use the space to increase its
capacity of producing appliances parts in-house in order to reduce its
dependency on external part makers.
(Source: company’s website)
The company as an electrical appliance
manufacturer has a unique portfolio where it manufactures a total of 11
products for two Divisional Companies, namely Appliances and Life Solutions,
Panasonic Corporation. Products like home shower, vacuum cleaner, iron, bidet,
rice cooker and kitchen appliances are manufactured for Appliance Company while
the electric fan, ceiling fan, ventilating fan and dish dryers are manufactured
for Life Solutions Company.
These products are distributed within Malaysia
and also exported overseas to other countries in Asia, the Middle East, North
America and Europe. For the financial year (“FY”) ended 31 March 2019, domestic
sales contributed approximately 43% of total revenue, followed by Asia
(excluding Malaysia and Japan) at 31%, the Middle East at 20%, and the
remaining 6% sales are from other countries including Japan. The graph below
shows the company’s revenue by geography for FY2014 to FY2019.
The company’s strategy is to be the No. 1 Small
Home Appliance Factory in Asia, conceptualising the slogan to be “A Giant in a
Small Island”, which means to gain significant market share in niche businesses.
Being a key player in this market, the company aspires to widen its presence in
the market, especially for key products such as ceiling fans, home showers and
Panasonic Malaysia also aims to provide value
to customers in residential spaces such as bathrooms, kitchens, living rooms,
and bedrooms. To do this, the company is focused on developing key products
with high growth potential such as slow cookers, meat grinders and blenders
with enhanced features and new design for small kitchen appliances. The company
is in the process of developing smart home products under the Panasonic brand,
and hope to release its first product in the near future.
One of the main issues faced by the
manufacturing industry today is the rising cost of labour and labour shortage
in the market. To overcome these issues, the company has taken steps to invest
in the use of automation and robotic systems to reduce the reliance on human labour.
In the Life Solutions division, a total of 17 units of robotic systems have
been installed to help facilitate the accelerate work in several parts of the
production processes. The use of these 17 units of robotic systems has resulted
in savings of approximately RM1.0 million per annum.
The company has also invested in an Auto
Brazing system in the Appliances division. After the installation of 5 units of
robotic systems, the company is able to produce more stable quality tanks at
double the output rate and give further savings of approximately RM0.6 million
per annum. With the successful implementation of these automated systems, the
company is looking into further expansion of similar automation in other
Panasonic Corporation (Japan) (TYO:6752) is the
ultimate holding company of Panasonic Malaysia. The following is a list of its
top 20 shareholders, which is extracted from the company’s 2019 annual report.
We note the presence of various institutional shareholders which in our
experience is a possible indication of a generous dividend payer.
(Source: 2019 annual report)
1: Growth in revenue and profits
Panasonic Malaysia’s growth in revenue and net
profit after tax is modest, at CAGR of 4.64% and 5.54% respectively from FY2014
to FY2019. As growth in net profit after tax is slightly higher than growth in
revenue, management seems to be efficient in managing its costs.
Panasonic Malaysia enjoys decent net profit margins
of 12.2% – 18.9%. Return on equity ratios ranged from 9.0% – 13.5% for the past
six years indicating proper usage and allocation of shareholders’ funds.
Panasonic Malaysia’s management is extremely conservative.
The company has cash and cash equivalents of approximately RM623.31 million as
at 31 March 2019 and zero borrowings. In fact, its cash and cash equivalents is
roughly 30.24% of its current market capitalisation of RM2.05 billion!
Moreover, the cash and cash equivalents of
RM623.30 million consist of RM480.00 million in fixed deposits and RM143.31
million of cash and bank balances. The fixed deposits are the placement of
funds with a related company, Panasonic Financial Centre (Malaysia) Sdn Bhd,
where the weighted average interest rate of fixed deposits was effectively
3.91% in FY2019. We would prefer management to put these monies to better use
to generate high returns for shareholders.
4: Dividends payout
The company has been consistently paying out
dividends every year. In fact, its dividend per share has increased from approximately
RM0.694 per share in FY2014 to RM2.262 per share in FY2019. This shows us that
its business is cash generative.
In fact, the company has a negative cash
conversation cycle throughout FY2014 to FY2019. This means that the company
needs less time to sell its inventory (or produce it from raw materials) and
receive cash from its customers compared to the time in which it has to pay its
suppliers. Think of it as an interest-free way to finance operations through
“borrowing” from suppliers.
of 3Q 2020 financial results
While writing this piece, Panasonic Malaysia released its financial results for the third quarter ended 31 December 2019. A snapshot is enclosed.
The company’s revenue for the nine months ended
31 December 2019 was lower by RM54.9 million or 6.1% as compared to the
previous year’s corresponding period mainly due to lower domestic sales for
both home appliances and fan products and lower export sales mainly to the
Middle East market. Despite the lower revenue, the company achieved a higher
combined profit before tax of RM107.3 million or 0.7% as compared to the
previous year’s corresponding period mainly due to lower cost of materials,
improved profit margins for certain products and reduction in fixed costs.
The company opined that going forward domestic
growth may be impacted by the recent politic developments which have created
uncertainties and volatility in the market. It also highlighted that the
Covid-19 outbreak in China, it remained unresolved, may expose the company to
supply chain risks as certain materials and parts are sourced from China.
Nevertheless, the company will continue to
strengthen its manufacturing capabilities through the continued expansion of
robotics and automation systems in its facilities and enhancement in the IT
systems to improve the company’s productivity.
With a closing share price of RM33.70 as at 21 February
2020, Panasonic Malaysia is trading at a price of earnings (PE) ratio of 19.58,
with an indicative yield of 6.71%. In times of uncertainty, investors looking
for steady dividend distributions can pay close attention to this company.
An accountant by training, F.I.R.E 2030 is a student of value investing since 2012. She believes that successful investing requires discipline and patience. But with the right knowledge and temperament, ordinary investors can achieve extraordinary results. These articles are her journals on stocks and the investing journey toward financial freedom in 2030.