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HLBank Research Highlights

Author: HLInvest   |   Latest post: Fri, 15 Oct 2021, 9:43 AM

 

Pecca Group - Steep Valuations

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In FY22, we expect Pecca to leverage on the anticipated strong demand for CKD cars in the near term (driven by SST exemption until end of CY21) and PPE products. The group has also proposed to acquire 51% Rentas (RPT) as part of its diversification plan into the distribution channel of PPE products. However, we believe current share price has overshot the group’s earnings fundamentals. Maintain SELL recommendation with unchanged TP of RM2.00, based on PE 15x on CY22 profit.

FY21 earnings recap. The dismal 4QFY21 core PATMI of only RM0.4m, was mainly affected by production halt (of leather seat cover) under Phase 1 in June. Nevertheless, FY21 core PATMI still recorded a +69.9% jump to RM18.1m, due to a combination of: (i) low base effect (2HFY20 was heavily impacted by MCO1.0), (ii) accelerated production of leather seat cover in line with the industry-wide ramp up production of CKD cars to meet the higher demand during SST exemption period, (iii) strict cost cutting measures since end of FY20 (reinstated by end FY21) and (iv) new contribution from PPE production in FY21 (revenue of RM17.9m with estimated PBT RM3m).

Leather car seats. Management guided production for leather seat cover has since recovered with government relaxing lockdown measures by mid-Aug. Production rate has been ramped up and achieved more than 10k sets/mth (maximum capacity of 18k sets/mth). Management expects sales to be driven by automotive OEMs accelerating CKD productions to meet the existing order backlogs and also anticipated new orders for current models and new launching in 4QCY21.

PPE. Since commencement in Aug 2020, Pecca continues to ramp up PPE productions which contributed RM17.9m to revenue and estimated RM3m to PBT in FY21. Despite the increasing market competition, management is strategizing on higher margin facemask products such as 4-ply and KN95 as well as upcoming KF-94 and N95- duckbill. Its sole distributor Rentas (currently under owned by major shareholder’s family) is has been targeting both online and offline channels.

Acquiring 51% Rentas Health (Rentas). The proposed acquisition of 51% stake in Rentas for RM100m (a RPT) is currently pending minority shareholders’ approval. To recap, the acquisition will be satisfied by RM50m cash and 12.0m new shares in Pecca based on RM4.17/share. Despite current share price having fallen to below RM3/share, there is still no update from the board of directors if there will be an adjustment to the acquisition details. Rentas has provided 1-year profit guarantee of not less than RM23m (indicative of 8.53x multiple, based on the RM100m price tag). Management does not expect the recent government’s move in placing a price cap to saliva-based Covid-19 testing kits to have material impact to Rentas’s conventional RT-PCR test kits (claimed to have higher accuracy).

Forecast. Unchanged.

Maintain SELL, TP: RM2.00. Maintain SELL recommendation on Pecca with unchanged TP of RM2.00 based on PE 15x on CY22 profit. While we are positive on Pecca’s near term leverage on the strong TIV rebound in 4QCY21 (driven by SST exemption) and the new PPE contribution, we believe current share price has overshot the group’s earnings fundamentals. Furthermore, competition within the PPE space is intensifying, seeing that the pandemic could eventually morph into an endemic.

 

Source: Hong Leong Investment Bank Research - 21 Sept 2021

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PECCA 3.24 -0.01 (0.31%) 160,000 

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