• We maintain BUY on Pecca Group with an FV of RM1.66/share based on an unchanged FY20F PE of 15.0x.

• Key points from the group’s analyst briefing on Friday:

1) Efforts to hold up margins at 2QFY19. Management guided that it would work to defend margins at the 2Q level with better management of costs and raising its average selling price (ASP). Pecca is working to lower its material costs by seeking alternative sources of leather and it is in the process of negotiating for higher ASP with certain key clients. Margins should also be supported by the move to prioritize the OEM and exports segments, rather than leather-cut pieces. Management guided that the gross margins for OEM, REM and leather-cut pieces are at 30%, 50% and 10% respectively.

2) Other growth prospects. Pecca will focus on strengthening its foundation from its sale of car seat covers. Apart from this, the group still holds on to its ambition to develop its aviation segment. It is in the process of obtaining approval for a licence to provide leather seat covers for non-national airlines. This remains a potential growth area for Pecca although we retain a conservative assumption for aviation earnings until the group secures the necessary licence and its first major contract.

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

Source: AmInvest Research - 4 Mar 2019