Investment Highlights

• We maintain our BUY call on Pecca Group with an unchanged FV of RM1.46/share based on FY21F PE of 15.0x, which is in line with the stock’s 3-year historical average. The recent weakness in Pecca’s share price presents an appealing entry for the stock with a 38% upside. No changes to our earnings estimates.

• Pecca’s 1HFY20 core net profit of RM8.5mil (-7%YoY) was in line with our expectations, accounting for 50% and 47% of our and consensus forecasts respectively.

• Pecca’s Automotive’s (car seat cover division) top line grew 7% YoY in 1HFY20 to RM56.0mil. The OEM segment registered a 1HFY20 revenue of RM43.4mil (+33% YoY), an improvement we believe was highly attributed to the increase in production for new car models. The REM segment recorded a lower 1HFY20 revenue of RM6.7mil (- 38% YoY) due to lower orders from Singapore as a result of the Certificate of Entitlement restrictions in the country. Meanwhile, PDI achieved a lower sales revenue of RM5.8mil (-32% YoY) due to slowdown in productions.

• We noticed an impressive improvement in Pecca’s sales of leather cut pieces, registering a total revenue of RM7.2mil (+56% YoY). This was attributed to a new project secured in China. We believe that the group is supplying leather cut pieces to Suzuki.

• Pecca’s export business continues to flourish as we see stronger revenue contribution from Singapore (+35% YoY), and Oceania (+20% YoY). However, these were dampened by slower sales contribution from Europe and North America, where the group posted lower revenue of RM1.3mil (-18% YoY) and RM0.8mil (-39% YoY) respectively. Exports contribution improved by 17% YoY in 1HFY20.

• Pecca managed to further strengthen its balance sheet with a net cash position of RM99.9mil in 2QFY20. Forward dividend yields of 5.2–5.6% are attractive based on a payout projection of 60% for FY20–22.

• We continue to like Pecca because: (1) it is the sole supplier of leather car seats, a key beneficiary of Perodua’s dominance in the local automotive sector; (2) its expansion plan to China being put in place; and (3) the group’s potential entry into the lucrative aircraft seat segment if it manages to secure a licence to provide OEMs/REMs for the non-national aircrafts.

Source: AmInvest Research - 24 Feb 2020