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This article first appeared in Corporate, The Edge Malaysia Weekly, on September 19 - 25, 2016.

 

SALES of smaller companies involved in the manufacture of electrical appliances have continued to grow despite the weak consumer sentiment. This could be what is supporting the share prices of most home electrical appliance companies. Year to date, most of these counters have seen splendid gains with Panasonic Manufacturing Malaysia Bhd topping the list. Its share price has surged about 50% to RM36.10 last Thursday.

Other smaller producers, such as Khind Holdings Bhd and Pensonic Holdings Bhd, have risen 12% and 16% respectively, in stark contrast to the benchmark FBM KLCI, which has dipped 2.33% YTD.

Fiamma Holdings Bhd, which has diversified into property development, is the only loser, falling 1.23% YTD.

According to MIDF Research analyst Khairun Adila Khazali, despite the softening consumer sentiment, the consumption of home electrical appliances has been healthy as they are considered needs by consumers.

She believes the Goods and Services Tax has had a stronger impact on discretionary items.

The recent festive promotions and the mid-year sales have also contributed to stronger sales of home appliances.

She tells The Edge in an email reply, “We are expecting this growth to continue in the second half at a more conservative rate.”

Improving margins may have also fuelled gains in share prices of most electrical home appliance counters.

Khairun Adila says the companies have been able to maintain margins due to their continuous efforts to reduce operational costs.

She cites Panasonic as an example, saying that although margins may have been squeezed domestically, it still benefits from export sales, to the Middle East, for example, which have higher margins.

“Thus, home electrical appliance companies such as Panasonic, which has a strong foothold in the industry, are safe stocks to invest in,” she says.

However, she recently downgraded Panasonic to “neutral” as the share price hit RM36.10, close to her target price of RM36.18.

Fund managers who have been contacted by The Edge are also of the view that Panasonic’s valuation is overstretched. The stock’s price-earnings ratio (PER) is the highest among its peers at 14.3 times.

However, a quick check on Absolutelystocks.com indicates that Panasonic is the only cash-rich company among its peers. The stock also has the highest return on equity of 20.8%.

Four home electrical appliance stocks offered dividend yields ranging from 3.9% to 4.3%.

Fiamma, which distributes various brands of electrical appliances, has the lowest PER of 6.8 times and Khind and Pensonic were pegged at 9.7 and 7.9 times respectively.

To fund managers, home electrical appliance manufacturers are not as attractive as other sectors because of their thin margins and lack of liquidity.

According to Absolutelystocks.com, Fiamma has the highest net margin of 14.5%, but the group also has an active property development arm.

Panasonic’s margin is also in the highest range of 13.7%.

In separate interviews with The Edge, Khind Holdings CEO Cheng Ping Keat and Pensonic Holdings managing director Vincent Chew say they have embarked on various strategies, such as focusing on higher-margin electrical items, to improve their bottom lines.

Cheng says Khind’s margin improved to more than 4% recently, following improvement in sales, reduction in expenses and switching focus to higher-margin items. He indicates the group will likely maintain its margin at 4% to 5%.

He says the group’s FY2016 net profit is likely to surpass FY2015’s RM6.18 million and FY2014’s RM12.16 million as Khind could achieve total sales of up to RM360 million in the financial year ending Dec 31, 2016, which is higher than last year’s RM337.8 millon.

In 1HFY2016, the group has achieved sales of RM180 million and its net profit jumped 146.87% to RM6.82 million from a year ago.

“[In terms of profit], FY2013 was a record high, but excluding the gain on property disposal, FY2014 was the highest. We believe we will return to our glory days,” Cheng says.

The group is more cautious now after its net profit halved to RM6.18 million in FY2015 from FY2014, dragged down by provision for bad debt and the departure of the management.

“This year, we managed to reverse the situation. Things are not as bad as last year. There is an overall improvement,” Cheng says.

Although seeing signs of a slowdown, he says sales in the second half were generally better than the first half because dealers tend to achieve their sales targets in December. The Zika virus outbreak has pushed up sales of the group’s insect killer.

“We produce essential electrical products, not big ticket items, for which people normally delay their decision-making,” he says, adding that the company’s main products, such as fans, are driven more by hot weather than market sentiment.

On the intense competition from Chinese players, Cheng emphasises that Khind can make products at more competitive prices and its growing market share abroad shows that the group can compete internationally.

Its export turnover has more than doubled to RM166.5 million in FY2015 from RM77.7 million in FY2011.

Cheng says the group will continue to grow its export market as the Malaysian market is saturated. Currently, half of the group’s sales come from overseas. The group exports its products to over 60 countries.

Cheng says the group’s business has so far not been affected by the political uncertainty in the Middle East and he still sees potential in that region.

Pensonic Holdings’ Chew also expects the group’s profit for the financial year ending May 31, 2017 (FY2017), to improve marginally or at least maintain the level of FY2016. It plans to grow its market share with small domestic appliances (SDA).

The group’s net profit in FY2016 fell 35.91% to RM11.35 million from a year ago. The lower profit was mainly due to a higher base — a gain on disposal of property of RM8.5 million in FY2015.

“Some of our premium brands of major domestic appliances (MDA), including build-in appliances, are facing a slowdown while SDA are still helping to generate revenue,” Chew says.

He says SDA, which contributed less than 70% of group sales in FY2014, have increased to 80% today.

Moving forward, he says, Pensonic will continue to maintain efficiency levels and monitor areas where improvements are needed. “We have improved our operational efficiency, especially over the last three years. We believe [we have] reached the ultimate peak of performance in a short period,” he adds.

Chew says two major projects are underway and they will contribute to the group’s earnings in the next two to three years. Details will be made known once things are firmed up later this year.

The group, which has a presence in Southeast Asia and the Middle East, is looking at investing in selected countries, working with distributors and forming joint ventures.

“By doing so, we will have better control over our brands,” Chew says.

On the group’s high gearing, he says it is due to the big investment in the new head office and R&D centre in Simpang Ampat, Penang. “However, these are short-term loans, which will be paid off in the next three years.”

Fiamma, which has seen its net profit dragged down by its property development segment, expects results for the fourth quarter ending Sept 30, 2016 (4QFY2016), to be close to 3QFY2016’s.

The group made a net profit of RM5.96 million in 3QFY2016. Net profit slumped 52.37% year on year to RM12.28 million in 9MFY2016 due to lower contribution from the trading and services and property development segments.

“We expect trading and services to remain the main contributor in FY2017 with the introduction of new models and product ranges from various brands,” a company executive tells The Edge in an email.

She says the market has softened but Fiamma will continue to focus on its distribution business to stay as a market leader.

“We will continue to invest in brand-building and promotional activities to strengthen and expand our distribution network,” she adds. 

 

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