Investment Highlights

• We are downgrading Pecca Group to UNDERWEIGHT from HOLD, with an unchanged FV of RM0.83/share, pegged to an FY21F PE of 10x. We leave our FY21–22F estimates unchanged, while we introduce our FY23F earnings forecast of RM20.4mil.

• Pecca’s FY20 core net profit of RM7.9mil (-52%YoY) came in within expectations, accounting for 98% and 100% of ours and consensus full-year forecasts respectively.

• Pecca’s automotive (car seat cover division) top line dropped 20% YoY in FY20 to RM104.1mil. The OEM segment registered an FY20 revenue of RM69.3mil (-12% YoY), a decline due to lower production volume brought about by the MCO, albeit partially mitigated by an increase in production for new car models throughout the financial year. The REM segment recorded a lower FY20 revenue of RM10.8mil (-49% YoY) due to lower orders from Singapore as a result of the Certificate of Entitlement restrictions and also the implementation of the circuit breaker in the country. Meanwhile, PDI posted a lower sales revenue of RM9.1mil (-38% YoY), also due to a slowdown in production which we believe is largely due to the MCO.

• However, we noticed an improvement in Pecca’s sales of leather cut pieces in FY20, registering a total revenue of RM9.9mil (+5% YoY). This was attributed to a new project secured and we believe that the group’s new client is Suzuki in China.

• Pecca’s export business declined with weaker revenue contribution all major regions (i.e. Europe, North America, Singapore and Oceania) and we strongly believe that this was due to the Covid-19 pandemic, which has dampened the production of cars globally. Based on our estimates, Pecca’s exports operations contributed to 17.4% of its total top line in FY20.

• The group declared a dividend of 4.6 sen for FY20, translating into a payout ratio of 100%. Pecca’s balance sheet remained healthy, sitting on a net cash position of RM78.4mil or 44.2 sen/share in as at 30 June 2020 with zero borrowings. Forward dividend yields of 2.9–3.6% are decent based on a payout projection of 40% for FY21-22F.

• While we believe that Pecca’s automotive division will continue to benefit from Perodua’s sustained dominance in the local auto sector, we think that upside to the stock is limited as valuations are stretched at 14x FY21F EPS as an auto parts player. Downgrade to UNDERWEIGHT.

Source: AmInvest Research - 1 Sept 2020