Investment Highlights

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

• Pecca’s 9M19 core net profit of RM13.8mil was in line with our expectations, accounting for 76% and 83% of our and consensus forecasts respectively. The group displayed yet another strong quarter after its historical high in 2Q19, registering core earnings of RM4.7mil (+135% YoY) in 3Q19.

• Pecca’s efforts to ramp up its exports business are bearing fruit with higher revenue contributions from Singapore (+7% QoQ, +37% YoY), Europe (+81% QoQ, +62% YoY) and North America (+8% QoQ, +9% YoY) respectively in 3Q19. The only notable drag geographically was from Oceania, where the group recorded a revenue of only RM0.4mil (-4% QoQ, -42% YoY). With that said, export contribution rose to 17% from 15% in 2Q19.

• In the automotive–car seat covers division, there were major improvements in all segments on YoY basis. The OEM segment registered a record revenue of RM22.1mil (+7% QoQ, +55% YoY) due to the increase in production of new car models. The REM segment recorded a revenue of RM5.3mil (+8% QoQ, 11% YoY) attributed to higher revenue orders from Singapore and Europe. Lastly, PDI achieved RM3.4mil (+41% YoY) in sales.

• 3Q19 saw Pecca’s aviation division improving 23% YoY in revenue with a marginal contribution of 0.3% to the group’s topline. The group is still in the process of obtaining the approval for a licence to provide leather seat covers for non-national airlines. Should this materialize, we believe it will be a potential growth catalyst for Pecca.

• There was a significant decline in the supply of leather cut pieces by 65% YoY, posting only RM2.1mil in 3Q19. This is in line with Pecca’s long-term strategy of prioritizing on the OEM and exports segments rather than leather cut pieces. The key reason for this was the low gross margins from the leather cut pieces segment.

• Pecca managed to further strengthen its balance sheet, almost doubling the net cash position to RM94.0mil in 3Q19 from RM47.2mil in 2Q19. Forward dividend yields of 5.5–6.2% are attractive based on a payout projection of 60% for FY19–20. We believe that OEM and export sales should continue to be the growth drivers for Pecca.

Source: AmInvest Research - 27 May 2019