Investment Highlights

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

• Key updates:

1) Pecca to benefit from Proton’s higher sales volume from the recent and upcoming new launches. The group guided that Pecca will be a key vendor for Proton’s recent launches of the Iriz, Persona, Exora and the upcoming Saga launch. We note that all four models offer either semi or full leather seats in their premium variants. We deem this to be positive as it will lower Pecca’s reliance on Perodua, while still being able to grow the group’s revenue stream. With that, we believe that Pecca’s earnings growth will continue to be compelling for FY20 due to the ongoing strong bookings for the Perodua Aruz and the aforementioned volume-oriented Proton models.

2) Moving towards a more favourable product mix. In the recent 3Q19 results, Pecca recorded an all-time low in quarterly supply of leather-cut pieces of RM2.1 mil (-65% YoY). This is in line with Pecca’s long-term strategy to support profitability margins by prioritizing OEM and export segments, rather than leather-cut pieces.

Pecca also mentioned that it is constantly reviewing negotiations with car manufacturers and suppliers. This is done to continuously manage their long-term pricing strategy to maintain a healthy ASP level (circa RM1.0K) for its products. Having said that, we expect profit margins to improve in the coming quarters based on a more favourable product mix and stable ASPs.

3) Light at the end of the tunnel for the aviation segment? As at the latest quarterly results (9M19), Pecca’s aviation segment remained insignificant, contributing less than 1% to the group’s total topline. The group guided that it remained hopeful that it will be able to obtain the licences and approval to provide OEMs and REMs for non-national aircraft by end-CY2019, which will give Pecca the legal right to distribute and install leather seat covers and other related products to non-national aircraft. If the group successfully obtains the licences, we believe it can help to organically grow Pecca’s aviation segment in the future.

• Pecca remains one of our sector’s top pick as it serves as a key beneficiary of Perodua’s dominance in the sector. The group’s plans to secure license to provide OEMs/REMs for non-national aircraft are seen as a potential growth catalyst.

Source: AmInvest Research - 5 Jul 2019