Investment Highlights

• We upgrade our call to HOLD from UNDERWEIGHT with a higher fair value of RM1.05/share, pegged onto an FY21F PE of 12x (from 10x), which is in line with its 3-year historical mean forward PE.

• We increase our FY21–23F net profit forecasts by 8%, 9% and 2% respectively to account for higher revenue from new key OEM supply contracts and key new model launches in the group’s FY21F.

• We came away feeling mildly positive from Pecca’s virtual analyst briefing yesterday. Below are the key highlights:
   
  • Pecca noted that it will be supplying to four key models – the Proton X50 (tentative launch in October–November 2020), Mitsubishi Xpander (tentative launch in November 2020), Nissan Almera (tentative launch in 4QCY20) and the Perodua D55L (tentative launch in January 2021). From the tone of the analyst briefing, we strongly believe that the group is not a supplier to the upcoming Honda City. The group said that it is currently operating on an 85% utilization rate on a one-shift basis.
     
  • The group highlighted that its production of 3-ply masks has commenced, while that of the N95 face masks will commence soon. The group is in active discussions with several healthcare product distributors to market and distribute the PPE products in both the commercial and healthcare industries.
     
  • The current annual production capacity of the 3-ply masks stands at 18mil units (or 1.5mil units/month). The group highlighted that it plans to increase its annual production capacity to 600mil units (or 50mil units/month) by 4QCY20. However, Pecca has not confirmed the capacity expansion and it has not shared the total capex guidance for this expansion. We are maintaining our estimates for now.
    
    While we believe that the expansion will be earnings accretive for Pecca, margins will be squeezed due to: 1) the potential implementation of a reduced ceiling price for face masks to RM1.00 (from RM1.50 previously) by the government; and 2) a low barrier of entry which results in rising competition for the supply of face masks.
     
  • Pecca is also trying to export its PPE products to the overseas market. It is currently applying for certifications from the US FDA and CE Marking from the European Union. We believe that this may be an uphill task as the relevant authorities are very particular on the make and quality of the products.
     
• Moving on to Pecca’s aviation division, the group highlighted that there will yet be another delay in obtaining the EASA (aircraft maintenance) licence until further notice, due to the Covid-19 pandemic.

• All-in, we are mildly positive on the group’s new venture into the PPE business as it will be earnings accretive. We believe that the worst is over for the group, and its automotive division is expected to benefit from Proton and Perodua’s dominance in the local auto sector and the improving sales of the two marquees due to the SST exemption. We also take comfort on the fact that the group has confirmed that it will be supplying to the long-awaited national SUVs – the Proton X50 and Perodua D55L. With that, we upgrade our recommendation to HOLD. Nevertheless, further upside in share price may be limited as Pecca is already trading at a PE of 14x on FY21F EPS.

Source: AmInvest Research - 4 Sept 2020