Investment Highlights

• We maintain our HOLD call on Pecca Group with a higher FV of RM0.83/share (from RM0.76/share previously), pegged to an FY21F PE of 10x.

• We raise our FY21–22F net profit forecasts by 8% and 9% respectively. The earnings upgrade is to reflect the additional revenue and profit contribution from Pecca’s new business venture, further explained below.

• Pecca recently announced that it is venturing into the developing, producing and supplying of personal protective equipment (PPE) that includes: i) face masks, face shields; and ii) PPE garments to both the commercial and medical communities, targeting both domestic and export markets.

• We highlight the following takeaways from the group’s recent analyst briefing:

• Pecca has allocated RM2.2mil in capex for the purchase of machineries and the set-up of a cleanroom. This will be funded by internally generated funds and will not have any negative impact on its balance sheet strength. The group has a net cash position of RM91.0mil.

• There will be two business segments: 1) face shields; and 2) PPE garments. The bulk of the RM2.2mil capex will be allocated to the face shield segment, in which the group will need to invest in new machineries and set up a cleanroom. For the PPE garment segment, the group said that it will share synergies and utilisation of machineries with its auto manufacturing line.

• Pecca said that it is in the midst of applying for approvals and certifications from all relevant authorities for the PPE business activities, which will be expected to be fully ready by late July or early August. The production is expected to commence within 1QFY21. Earnings from the PPE business will start to kick in from FY21 onwards.

• It also said that all its face masks and PPE garments will be of “hospital grade”, suited for medical and healthcare professionals.

• The annual production capacity (as shown in Exhibit 1 below), is based on a one-shift daily operation. Raw materials will be sourced from China, and the group has given a guidance of an annual incremental revenue approximately RM25.0mil (at 100% utilisation on a one-shift basis). The group expects a “low double-digit net profit margin” from this venture.

• However, we are taking a slightly conservative stance, and will be assuming an utilisation rate of 50% and 60% respectively for the group’s new venture for FY20–21F, with a net profit margin of 10%.

• Moving on to Pecca’s aviation division, the group highlighted that there will be another delay in obtaining the EASA (aircraft maintenance) licence due to the Covid-19 pandemic.

• All-in, we are mildly positive on the group’s new venture into the PPE business space. We strongly believe that the group’s automotive division will continue to benefit from Perodua’s sustained dominance in the local auto sector. However, we see that the upside to the stock is limited as valuation is stretched at 11x FY21F EPS. Maintain HOLD.

Source: AmInvest Research - 1 Jul 2020