Investment Highlights

• We are maintaining our BUY recommendation on Pecca Group with a lower FV of RM1.46/share from RM1.66/share based on a rolled-over FY21F PE of 15.0x.

• We reduce our FY20–21 projections by 18%–28% after trimming our assumptions on leather cut pieces supply assumptions from 11.7K units to 10.0K units (-10%) and increase our assumptions on additional administrative expenses for both forward years.

• Pecca’s FY19 core net profit of RM16.5mil was below our expectations, accounting for 91.0% of our and consensus forecasts respectively. On a full-year basis, core earnings improved by a whopping 63% YoY backed by a 17% growth in revenue to RM131.4mil.

• We witnessed an improvement in all product mix in Pecca’s car seat covers division, where revenue contributions from OEM, REM and PDI increased 53%, 1% and 28% respectively. This has ultimately led to a 37% YoY improvement in the said division’s revenue to RM114.3mil. With that said, we note that OEMs and REMs were still the key revenue drivers for the group in FY19, and we expect that to continue in the future to provide better profit margins, as guided by the group earlier.

• We saw how Pecca’s efforts to elevate its exports business bearing fruits with higher revenue contributions from Singapore (+37% YoY), Europe (+12% YoY) and North America (+26% YoY). The only notable drag was from Oceania, where the group recorded a dip of 44% YoY to RM2.0mil for FY19. In FY19, domestic and exports contributions were 83% and 17% respectively.

• There was a 58% fall in the supply of leather cut pieces supply, resulting in a revenue of RM9.4mil for the year. This was in line with Pecca’s long-term strategy of prioritizing on 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 and the group intends to focus more on other product line-ups which have higher margins.

• Pecca maintained its impressive balance sheet strength, having a net cash position of RM92.8mil with no borrowings. No dividend was declared for the quarter and the full-year dividends of 2.5 sen/share (payout: 28%) were below our expectations and management’s guidance of a payout policy of 40% in FY19.

• 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 plan to secure a license to provide OEMs/REMs for non-national aircraft is seen as a potential growth catalyst.

Source: AmInvest Research - 26 Aug 2019