Investment Highlights

• We maintain our UNDERWEIGHT call on Pecca Group with a lower FV of RM0.55/share (from RM0.63 previously) pegged to an FY21F PE of 8x.

• We cut our FY20–22F net profit forecasts by 46%, 23% and 10% respectively. The earnings downgrade is to reflect lower sales volume assumptions due to: i) the prolonged movement control order (MCO); and ii) weaker market demand as consumer appetite for big-ticket items is unlikely to fully recover to the pre-Covid-19 levels in the near term. This in turn affects vehicle productions and demand for Pecca’s leather seat products.

• Pecca’s 9MFY20 core net profit of RM8.7mil (-37%YoY) was below with our expectations, accounting for 58% and 55% of our and consensus forecasts respectively.

• Pecca’s automotive (car seat cover division) top line dropped 6% YoY in 9MFY20 to RM89.0mil. The OEM segment registered a 9MFY20 revenue of RM59.1mil (+8% YoY), an improvement that we believe was highly attributed to the increase in production for new car models in 1HFY20. The REM segment recorded a lower 9MFY20 revenue of RM9.5mil (-42% 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 RM8.1mil (-32% YoY) due to a slowdown in production.

• We also notice a substantial slide in Pecca’s sales of leather cut pieces in the latest quarter, registering a total revenue of only RM1.3mil (-63% QoQ, -33% YoY) in 3QFY20. This was attributed to lower orders from China with Covid-19 extending the Lunar New Year holidays.

• Pecca’s export business declined with weaker revenue contribution from Europe (-31% YoY), and North America (-25% YoY). However, these were partially mitigated by higher sales contribution from Singapore and Africa, where the group posted stronger revenues of RM10.7mil (+5% YoY) and RM1.6mil (+14% YoY) respectively. Pecca’s exports operations contributed to 17.4% of its total top line in 9MFY20.

• Nevertheless, Pecca‘s balance sheet remains healthy, sitting on a net cash position of RM91.0mil or 50 sen/share in 3QFY20. Forward dividend yields of 3.6–5.7% are decent based on a payout projection of 40% for FY20–22. The group declared a dividend of 3.0 sen for the quarter.

Source: AmInvest Research - 1 Jun 2020