Investment Highlights

• We maintain BUY on Pecca Group but lower our FV to RM1.05/share (from 1.10) as we adjust for a higher MYR/USD rate of 4.12 (from 4.05) and reduce the sales projection for its leather cut pieces.

• Pecca’s 1QFY19 core net profit of RM3.3mil was within expectations as it met 26% of our forecast and 25% of consensus.

• Pecca’s topline was swayed by the performance of its key customer but any temporary weakness was compensated by stronger sales in higher-margin segments.

• Pecca’s topline was noticeably weaker QoQ (down 7%) as OEM sales dropped due to the supply disruption experienced by Perodua in Sept. However, stronger margins from higher sales in its REM and PDI segments led to an improved bottom line.

• REM or exports rebounded as sales to Singapore normalized from this quarter. Carmakers there began to adjust to stricter rules on emissions from early 2018. This was guided by the group in the previous quarter.

• Meanwhile, PDI sales improved during the tax holiday as we believe carmakers sought to incentivize purchases during an exceptionally competitive period.

• The stronger REM and PDI sales raised the group’s gross profit margin to 29% (vs. 24% in 4QFY18 and FY18). We are assured of the return to form for these two segments, which had been the group’s key weaknesses in the preceding half-year.

• One cause for concern is the weaker contribution from its sales of leather cut pieces. This segment accounted for only 9% of the group’s topline in 1QFY19 vs. ~20% previously.

• Sales of leather cut pieces fell due to the discontinuation of 3 car models and we believe it would take a couple quarters to regain ground. Pecca would need to win new contracts from customers such as Toyota, which will produce the Vios from CY2019 and the Yaris from 2HCY19.

• We are still assured of strong earnings growth from this year, driven by the strength of Perodua sales. Sales of the Myvi have begun to moderate as the model marks its first full year but we believe this paves the way for Perodua’s new SUV eyed for 1QCY19.

• We believe OEM and REM sales should lead the way as PDI and leather cut pieces could lag visibly from the next quarter. Forward dividend yields of 5.8%–6.9% are still attractive based on a payout assumption of 70%.

Source: AmInvest Research - 27 Nov 2018