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Consumer Electronics Maker Panasonic Philippines Is Undervalued

- By Mark Yu

Panasonic Manufacturing Philippines Corp. (PHS:PMPC) reported its third-quarter results on Valentine's Day. The 2.8 billion Philippine pesos ($55.5 million) consumer electronics company reported 20% sales growth to 7.7 billion pesos for its recent nine-month fiscal 2016 operations - April to December 2016 - while having an outstanding 60% profit growth to 331.4 million pesos, a 4.3% profit margin.


In addition, Panasonic Manufacturing sees its overall sales growth improving by another 20% in fiscal 2017 and its sales tripling to 20 billion pesos by 2020 from its 2015 sales.


"We have slowly recovered in 2011 and by 2014 we attained full recovery." - Panasonic Manufacturing Philippines President, Shinichi Hayashi.



Valuations

Panasonic Manufacturing is significantly undervalued compared to its industry peer valuations. According to Reuters data, the company had a trailing price-earnings (P/E) ratio of 7.6 times (industry figure 29), price-book (P/B) ratio of 0.68 times (industry figure 0.89) and price-sales (P/S) ratio of 0.06 times (industry figure 10.4).

Panasonic Manufacturing had an annual dividend yield of 2.94%.

Total return

Panasonic Manufacturing significantly outperformed the local broader index, iShares MSCI Philippines ETF (EPHE), with 31.2% total return vs. 4.04% for the latter, according to Morningstar data. The Standard & Poor's 500 index, meanwhile, had 6.79% return in the same period.

In a five-year time frame, S&P 500 outperformed both the company and the local index with total return figures 14.12%, 4.95% and 4.68%.

Panasonic Manufacturing Philippines

Panasonic Manufacturing is a 53-year old Philippine corporation and also a subsidiary of Japan's Panasonic Corp. (TSE:6752)( PCRFF). The consumer electronics company primarily generates most of its sales in the Philippines - about 89% or 7.23 billion pesos of total fiscal 2016 sales - with the remainder overseas. Hong Kong contributed 10% while Africa generated 0.4% of total sales.

As of March 2016, Japan's Panasonic Corp. owned all of the Philippines' Panasonic Manufacturing's class B shares representing a 79.96% ownership, according to company filings. Panasonic Manufacturing, meanwhile, owned a 40% ownership in Precision Electronics Realty Corp.

Panasonic Manufacturing is a manufacturer, importer, and distributor of electronic, electrical, mechanical, electromechanical appliances, other types of machinery, parts and components, battery and other related products bearing the "Panasonic" brand.

Panasonic Manufacturing, through its subsidiary, is also in the business of realty brokerage. The partially owned Precision Electronics Realty leases out its land to the parent where the parent's manufacturing facilities are located.

Panasonic Manufacturing's primary products are refrigerators, air conditioners and washing machines. In fiscal 2016, Panasonic refrigerator products generated 40.6% or 3.25 billion pesos while air conditioner products contributed 34.8% followed by washing machines with 9.8% of total sales.

The company also sells electric fans, freezers, imported appliances like LCD/PDP TV sets, Digital AV products such as DVD/VCD mini-components, home theater systems, video and still cameras and D-Snap multi-AV devices among other things.

Panasonic Manufacturing also offers communications equipment/devices, office automation equipment, cooling equipment and various kitchen and home appliances such as rice cookers, vacuum cleaners and hair dryers/styler among other things.

Panasonic Manufacturing identified three business segments: global consumer marketing sector, system network communication and others.

(Global consumer marketing sector sales from 17-Q and 17-K filings, Panasonic Manufacturing)

Global consumer marketing sector

According to company filings, the global consumer marketing segment includes audio and video primarily related to selling products for media and entertainment industry. The segment also includes home appliance and household equipment primarily related to selling for household consumers.

In fiscal 2015, global consumer marketing segment sales grew 21% to 7.7 billion in sales or 94% of total Panasonic Manufacturing sales for the period. The segment also delivered a profit before tax margin of 5.1% compared to 3.6% in 2015.

Nine months into fiscal 2016, segment sales maintained the impressive 21% growth rate and delivered an income margin of 5.2% compared to 4.3% the year prior.*

*17-Q did not clearly indicate whether income from operations figure was to be treated as profit before tax.

(System network communication and others sales from 17-Q and 17-K filings, Panasonic Manufacturing)

System network communication

The system network communication segment includes office automation equipment such as telecommunication products, security system and projectors primarily related to selling for business consumers.

In fiscal 2015, system network communication sales grew 14.7% to 356.7 million or 4.4% of total company sales. The segment also had an income before tax margin of just 1.1% compared to 1% in 2015.

Nine months into fiscal 2016, system network sales fell by 0.9% and delivered an operational loss of 1.46 million compared to (also) loss of 10.5 million in the year-earlier period.

Others

Panasonic Manufacturing's other segment includes supermarket refrigeration such as cold room, showcases and bottle coolers primarily related to selling to supermarkets and groceries. The segment also includes solar panel which is primarily project-based selling, according to company filings.

In fiscal 2015, Panasonic's other segment sales grew by an outstanding 43% and contributed 1.4% to total company sales. The other segment had an income before tax of 2.24 million pesos compared to a loss of 16.23 million in 2015.

Three-quarters into fiscal 2016, segment sales exhibited another 23.8% growth while delivering a profit loss of 9.6 million pesos compared to 28.7 million pesos loss the year earlier period.

Meanwhile, Panasonic Manufacturing stated that total company sales growth for the recent nine-month period was mainly due to high sales achievement of consumer products and favorable retail sales of locally produced appliances particularly refrigerator and window air conditioners during its peak seasons that were during April to June and October to December.

On average, Panasonic Manufacturing had five-year sales, profit growth and margin averages of 2.7%, 41% and 2.05% (2).

Cash, debt and book value

As of December, Panasonic Manufacturing had 3.54 billion pesos in cash and cash equivalents and 3.2 million pesos in debt, representing a negligible debt-equity ratio that is similar to its year prior situation.*

*Also, Panasonic Manufacturing did not issue additional shares from the year prior with 422.7 million shares outstanding in total.

In 2016, Panasonic Manufacturing did not carry any goodwill or intangible assets having a book value of 4.32 billion compared to 4 billion in 2015.

Cash flow

(17-Q, Panasonic Manufacturing)

Despite the impressive profit growth for its recent nine months operations, Panasonic Manufacturing's net cash from operations, including taxes paid, experienced a hefty 46.4% decline to 266.5 million pesos brought by significant cash flow reduction from inventories, other current assets.

Capital expenditures were 28.2 million pesos leaving Panasonic Manufacturing with 238.3 million pesos in free cash flow compared to 447.6 million pesos the year prior (1).

(17-Q and 17-A, Panasonic Manufacturing)

Panasonic Manufacturing allocated 35% or 84.5 million in dividend payouts to shareholders. Interestingly, the company recorded positive free cash flow recently as shown in the image above.

Conclusion

Panasonic Manufacturing Philippines already sells far less than its recent three months operations having a P/S ratio of just 0.4 times.

Along with a steady growth in business segments, particularly its refrigerator and air conditioner products, that trails the country's overall growth that is expected to be between 6.5% and 7.5% this year.

The Philippines logged 6.8% gross domestic product (GDP) growth in 2016.

Meanwhile, Panasonic Manufacturing also demonstrated improving profitability in recent years having delivered a 226% rise to 3.13% profit margin in 2016 compared to 2012 operations thus explaining its admirable profit growth rates.

The company nonetheless exhibited a patchy free cash flow performance in recent years, but management forecast along with a consistent solid state of balance sheet partly alleviated this finding.

(Panasonic Manufacturing, iShares MSCI Philippines ETF and iShares Core S&P 500 ETF, Financial Times)

No analysts' coverage of Panasonic Manufacturing has been noted. Company shares currently show a possible 47% upside - despite recent runup - should the company trade its shares at book value. Meanwhile, asking a 20% margin would still indicate an 18% upside or a target price of 7.9 pesos a share.

In summary, Panasonic Manufacturing Philippines is a buy.

Notes

1. Me: There are conflicting figures in terms of capital expenditures for Panasonic Manufacturing Philippines using the recent quarterly filing, 17-Q, as a source.

(17-Q page 18, Panasonic Manufacturing Philippines)

(17-Q page 11, Panasonic Manufacturing Philippines)

2. As seen in the image above, the consolidated summary of cash flow identified that Panasonic Manufacturing generated positive cash flow from its property and equipment additions of $28.2 million rather than experiencing outflow - which is normal. A brief discussion earlier identified that it had spent the $28.2 million (Morningstar data).

Disclosure: I have shares in Panasonic Manufacturing Philippines local shares.

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This article first appeared on GuruFocus.