EUR 850.00 For Business Accounts Only

Morningstar | Panasonic’s Shares Are Undervalued but Lack the Near-Term Catalyst; Cut FVE to JPY 1,300

We cut Panasonic’s fair value estimate to JPY 1,300 from JPY 1,500 as we revise our long-term forecast. While Panasonic has been focusing its resources to benefit from the growth opportunity on automotive industry over the past few years, its profitability did not improve as projected. Consequently, Panasonic was not able to source enough money to support its consumer electronics business, and as a result, operating income of all segments declined from the previous year in fiscal 2019. Owing to the disappointment from the stagnation of Panasonic’s automotive business, its share price has halved from its peak in 2017. As mentioned on the previous note, we observe 1) lack of communication between the management and business domains, and 2) lack of speed on implementing structural reforms, and, therefore, we expect that a few years will be necessary to reestablish its growth strategy. Meanwhile, we view that the downside of the share price is limited as its valuation is at the lowest end over the past decade, and its dividend yield of 3.5% should be attractive for investors. Overall, we view that Panasonic’s shares are undervalued, while they lack a near-term catalyst.

Revenue of automotive and industrial systems, or AIS, segment increased 24% over the past two years, driven by the sales growth of infotainment system and rechargeable batteries. On the other hand, its operating margin dropped to 1.9% from 3.8% on the corresponding period because of the impairment loss on infotainment system and larger expenses related to lower production yield on rechargeable batteries. We view that 1) because of the intense competition, Panasonic had to offer lower pricing to get orders on infotainment system, and 2) Panasonic was too optimistic on managing massive production lines of Gigafactory. In other words, we view that huge pressure from management to pursue revenue growth forced the AIS segment to take unprofitable orders, which implies a lack of financial discipline.