Investment Highlights

• We maintain BUY on Pecca Group with an unchanged FV of RM1.05/share based on a CY19F PE of 15x.

• Key points from the analyst briefing on Tuesday:

1) Deliveries to Perodua to be ramped up in coming months. Management guided it will sell an average of 4.5K sets of car seat covers/month to Perodua in the next 6 months (vs. a previous target of 3K/month), as the carmaker looks to meet pending orders and make up for the supply disruption that hit two months of the Myvi’s production. This bodes well for Pecca as sales to Perodua form the foundation of its topline, last accounting for 39% of its revenue.

2) Supply to the new Perodua SUV could begin from December for a launch sometime in 1QCY19. Sales for this model would be of a lower volume and higher margin compared to the Myvi, as noted previously. We have projected a CY19 sales growth of 2% for Perodua, anchored to the continuing strength of the Myvi, the addition of the new SUV and some support from the recent Alza facelift.

3) Sales of PDI and leather cut pieces could slow down, as we highlighted previously. PDI sales rose 53% YoY in 1QFY19 and are largely tied to Nissan, which has seen its monthly sales moderate to 2.2K/month vs. 3.3K/month during the tax holiday. Leather cut pieces slumped to a two-year low from a cessation of sales to the Camry, outgoing Vios and Hilux. Pecca guided that revenue from this segment would remain flattish at best for the next few quarters.

4) Plans for the aviation segment still up in the air. Pecca continues its years-long process of obtaining a license to provide seat covers for the highly regulated aviation industry. Management could not provide a definite deadline for its execution and we have not imputed any major future contributions to the group’s earnings from this segment. Aviation revenue from small jobs to private aircraft currently fare at about ~RM150k/quarter vs. a cost base of RM200k/quarter, often resulting in a small loss.

5) M&A plans on hold as Pecca seeks a real growth driver. The group had previously guided that it was eyeing targets within the auto and leather spaces. Management said it is seeking acquisitions that would have a more substantial impact on earnings. It currently sits on a net cash pile of RM97mil. We don’t discount the need to raise debt and for the group to pare back on its generous dividend payouts (91% of its net profit in FY18) for the purpose of M&A.

• We reiterate that OEM and REM sales will be the backbone of Pecca’s earnings in coming quarters.

Source: AmInvest Research - 28 Nov 2018