• We maintain our BUY recommendation on Pecca Group with an unchanged FV of RM1.46 based on a FY21F PE of 15.0x.

• With the recent steep decline in its share price, we see value emerging in Pecca. The stock is now trading at 12.4x FY20 PE, below its 3-year historical average PE of 16.4x with a decent dividend yield of 4.3%.

• We came back positive from the recent analyst briefing with the following key takeaways:

1) Dividend policy of 40% intact. The management guided that the group’s minimum dividend payout policy of 40% remains intact for FY19, and the announcement will be made at a later date before its annual general meeting (AGM). However, we are projecting a payout assumption of 50%, which translates to a total dividend of 4.5 sen for FY19. Note that the group has already declared a dividend of 2.5 sen in 2Q19.

2) Obtaining licence to supply aircraft seats soon. The group reiterated that it is on track to obtain the licences and approval to provide leather seat OEMs and REMs for non-national aircrafts by the end of CY2019. Pecca has recently completed phase 1 of the licensing process. In the event group is successful in obtaining the licences, we believe that it will help to grow Pecca’s aviation segment organically. As of FY19, the group’s aviation segment only contributed about 1% to Pecca’s top line.

3) Further expansion of its exports business. The group guided that it will be highly focused on expanding its exports business to China and other parts of America as the business provides better margins than the domestic market. We are positive on this as the group will be able improve its overseas contributions besides riding on Perodua’s dominance in the domestic market. As of FY19, exports sales contributed 17% of its total revenue.

• 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 licence to provide OEMs/REMs for non-national aircrafts is seen as a strong potential growth catalyst.

Source: AmInvest Research - 28 Aug 2019