Consumer: Panasonic Manufacturing Malaysia Bhd

Introduction

Panamy previously known as Matsushita Electric Co (M) Bhd was formed in 1965 to manufacture household products under license from Matsushita Electric Industrial Co Ltd, Japan. Since then its focus has mainly involved in the manufacturing and distribution of electrical products which consists of consumer electronics, home appliances, batteries, office automation, project systems and room air-conditioners under the well known brand name of Panasonic.

The corporate structure of Panamy remains simple just like DutchLady structure. Panamy has a simple 47.45% owned associate which is Panasonic Malaysia Sdn Bhd (PMSB). Malaysia's Employees Provident Fund Board (EPF) also has a 6% stake in Panamy.

Export sales contribute about 50% of Panamy's turnover. Destination countries are Japan, Thailand, Singapore, Hong Kong, Vietnam, North America, Latin America, Europe, Africa and the Middle East. As you can see very diversified globally. Locally, Panamy has about 20% to 25% of the market share. The competition in the electrical sector is very intense which you probably can observe easily when shopping.

Fundamental

1. Does the company have an identifiable durable competitive advantage?

A mixed bag here. They are no.1 in terms of sales for air-conditioners. Panasonic's front loaders enjoy a 28.5% market share in Malaysia. Others include a 40% to 50% share of the fan market, 60% share of the rice-cooker market and 67% of the phone products market. Not so well include audio-visual products such as plasma TVs/flat screens and their Lumix range of digital cameras. There is a big list of items. Though it is a extremely well known brand for many years the industry is competitive but has an advantage as the brand is firmly entrenched in Asia.

2. Do you understand how the product/service works?

Every household needs appliances and they usually have a lifespan of 5 to 10 years before either get broken or be replaced with newer models. A growing population and increasing home sales will see demand on CE products at the same pace. What impresses me is that Panamy has incredibly high inventory and receivable turnover ratios. This simply means it sells it goods very quickly & gets money back quickly without holding them in warehouse for too long, thus inventory has almost no lost value.

• Inventory Turnover (days): 10 days to 15 days
• Receivables Turnover (days): 25 days to 35 days
• Industry Inventory TO avg: 5.17 months
• Industry Receivable TO avg: 6.42 months

3. What is the chance that it will become obsolete (KO) in the next twenty years?

No. It is an essential to have these kind of products at home in this age.

4. Does the company allocate capital exclusively in the realm of its expertise?

Absolutely. It has no expansion plans in the near future. Panamy now operates two plants in Shah Alam which produces electrical goods for both the domestic and export markets.

5. What is the company's financial history and status?

Net profit margin after taxation and return of equity trends well. The 5-year average for the company vs industry is as:

• Net Profit Margin: 8.13% vs 2.98%
• Gross Profit Margin: 60.19% vs 27.75%
• ROE: 8.10% vs 10.49%
• Revenue Growth Rate: -1.43% vs 6.22% (compounded annual growth rate or CAGR)

Year 2005 was where Panamy dispose Bangi plant, land and building for RM35.9 million in their non-profitable business of washing machines & refrigerators at that time. At the same time completed the retrenchment scheme with total compensation of RM19.4 million.

Year 2007 saw the escalating raw material and fuel costs and no more sales contribution from the disposed business line of washing machines and refrigerators.

Earnings Per Share has its share of ups and downs while Dividend Per Share is at a 5-year growth rate of -24.03% (Industry's avg is 7.06%) as shown in the chart above. While I applaud Panamy for trying to maintain a high payout ratio for dividends to earnings it cannot sustain itself by paying higher than their earnings every year unless it eats into their cash reserve.

6. Is the company conservatively financed?

Yes. Panamy has a very impressive balance sheet boasting a total of RM477.4 million cash in hand as of 31.12.2009. This is the reason why most analyst predict that Panamy is going to continue to pay high dividends to investors. Since it has no debts to service, I won't go into liquidity ratios.

7. Is the company actively buying back its shares?

The only reward came once in the year 2002 where it issued a 7 to 10 bonus. Panamy looks like it prefers to reward shareholder with higher than average dividend rates as compared to buying back shares or issuing bonus.

8. Is the company free to raise prices with inflation?

No data obtained. If you know let me know thanks. With intense competition, I only foresee prices of goods at competitive prices and less concern with inflationary effects.

9. Are large capital expenditures required to update plant and equipment?

Not for the time being, with sales at saturation point given the data obtained and Panamy's announcement that it has no plans to have a major expansion in the near future.

Discounted Cash Flow Analysis

It is difficult to project the revenue for Panamy in the next 5 years as the data shows that it has not been able to grow at all for the pass 5 years registering a growth rate of -1.43%. While the Industry average is 6.22%, I will use 1% to be on the safe side.

Operating Costs: 90% of revenue

Corporate Tax: 25%

Capital Expenditures: RM25 million considering no new facilities in the near term

Depreciation: RM17 million

Working Capital Cost: In tandem with revenue growth of 1%

Discounted Rate: 10%

Panasonic Manufacturing Malaysia Bhd is fairly valued at RM12.52. This is quite an optimistic valuation as compared to the current share trading price at RM19.90 which would put it at a discounted rate of nearly 6.5%. It is too risky to buy at that bloated price. Another indicator is the P/E Ratio which is at 18.64 vs Industry 14.03 and S&P 500 at 16.10. Avoid paying for a stock with too high multiple and Panamy is an example of that. Even if it is projected to grow sales by 5% Panamy's share price is only valued at RM15.16.

The stock has been rising steadily over the last 10 years until in 2010 where the price spiked up to an all time high of RM19.90. This happen in early 2010 which I believed is due to speculation as fundamentally I cannot justify the price. I am 90% sure that Panamy's stock price will go into correction once the momentum stops and comes profit taking. Everything that goes up must come down at one point. Gravity ma.

Conclusion 

The only reason to hold a Panamy stock is for its dividend though we do see capital growth from year 2005 to late 2009 because it has offloaded a non-profitable business of washing machines and refrigerators and recovered through consistent efforts to strengthen its products and improve operational efficiency.

Panamy does export and it accounts 50% of their revenue which is a good thing as the Malaysian market is at saturation point. Panamy has over 200 representative offices and branches spanning the American continent, Europe, Asia, Africa and the Middle East and Oceania. BUT the catch is that this industry remains very intense as you know there are many well known brands out there as well. Whether Panamy succeeds in expanding or eat more market share is something none of us can foresee and thus is a risk.

Going back to dividends, Panamy is very cash rich with fast inventory and receivable turnover rates. In order to profit from dividend is to buy at lower share price. Buying at fair value or less would translate into a dividend yield rate of 10% or more which is very drooling! Buying now would only result in a 5% dividend yield rate and most probably a loss in capital invested as the share might go into a correction.

It would take a couple of more years to see how Panamy's revenue growth rate is heading. It has successfully turned around after the year 2005 disposal of non-profitable business but revenue levels have not yet recovered to the levels seen in the early 2000s. With its export strategy seeing success things looks reasonable fine for the company.

Investing in Panamy is quite tricky. You need to monitor the competitive business landscape and buy at the right time at right price. With that you might profit from both the nice dividend yield & some capital appreciation. For now I wouldn't place my reserves into Panamy as it is just too risky and expensive.