EUR 850.00 For Business Accounts Only

Morningstar | Cutting Panasonic’s FVE to JPY 1,850 on Weak Appliances, but Battery Should Drive Shares in 2H

We are cutting Panasonic’s fair value estimate from JPY 2,000 to JPY 1,850 after revising our outlook for the appliance segment. Because of the global economic slowdown and the domestic consumption tax increase in October 2019, we think that revenue growth for the segment will stagnate over the next few years. Moreover, we are concerned about the intense competition of major appliances, because we believe it is difficult for most consumer electronic companies to establish an economic moat, which is why we’re trimming our margin assumption for the segment. Meanwhile, we retain our view that rechargeable automobile batteries will drive Panasonic’s margin expansion in the second half. We acknowledge that profitability of rechargeable batteries in the first half was below our expectations because of the lower production yield, caused by the rapid ramp-up of Tesla Model 3. However, we believe that production of Gigafactory will stabilize in the second half, contributing to the margin expansion, which does not materially change our long-term forecasts for the automotive and industrial systems segment.

Panasonic’s shares have dropped approximately 40% over the past year, as the market is disappointed about 1) the repeated delay on the monetization of the Gigafactory, 2) downward revision of this year’s guidance, and 3) weak resilience of the appliance business during the economic downturn, which makes its new guidance somewhat unreliable. Meanwhile, the current share price of 3.2 times enterprise value/EBITDA on fiscal 2019 basis is below its historical range of 4 to 7 times, suggesting that most concerns and risks are already priced in, and downside should be limited. We forecast that operating margin of the automotive and industrials segment will jump from 1.8% to 4.2% in the next quarter, which will be the catalyst for share prices in the second half.