Investment Highlights

• We maintain BUY on Pecca Group but raise our FV to RM1.66/share (from RM1.05) on a rolled over FY20 PE of 15.0x. We raise our FY19-21 projections by 47–72% to account for a higher sales projection and better margins.

• Pecca’s 1HFY19 core net profit of RM9.1mil exceeded expectations, forming 74% of our FY projection and 71% of consensus.

• The core net profit of RM5.8mil in 2QFY19 was Pecca’s best quarterly performance. Revenue improved 21% YoY and gross margin rose 5ppts from the previous quarter to 34%. This was attributable to stronger YoY production by Perodua and Nissan, and better margins from a higher contribution from OEM and exports, respectively.

• In 2QFY19, sales to OEM surged 69% QoQ as Perodua’s production rose to compensate for a supply disruption in the previous quarter, begin production for the Aruz SUV and prepare for the festive period ahead.

• We believe lower sales on a QoQ basis in Nissan and Toyota were mitigated by the strength seen in Perodua. PDI sales dropped 25% QoQ and the supply of leather cut pieces stayed weak for a second quarter. Pecca had emphasized that the latter provided for poorer margins when compared with OEM and PDI sales. OEM still accounts for most of Pecca’s total revenue (54%) vs. 14% from PDI and 8% from the supply of leather cut pieces.

• The two are represented largely by Nissan and Toyota respectively. Nissan had maximized on the tax holiday prior to 2QFY19, and the numbers from Toyota were lower for a second quarter (and down 70% YoY in 1HFY19) as it had discontinued the Camry, Vios and Hilux. Nissan sales have begun to normalize while Toyota’s have picked up visibly from January on production of the new Vios.

• On another positive note, export sales remained strong for a second quarter (resulting in a 4% YoY growth in 1HFY19) as the supply to Singapore normalized following the introduction of a new emission scheme last year.

• We believe OEM and REM sales should the way for Pecca. Forward dividend yields of 6.3–8.7% are attractive based on a payout projection of 60%.

Source: AmInvest Research - 1 Mar 2019