Investment Highlights

• We are downgrading Pecca Group to UNDERWEIGHT from HOLD with a higher fair value (FV) of RM1.99/share (from RM1.77/share previously) as we change our valuation methodology to sum-of-parts (SOP) from straight P/E of 13x. No ESG-related adjustments to our FV (Exhibit 4).

• Pecca’s 9MFY21 core net profit of RM17.8mil (adjusted predominantly for reversal of impairments of RM2.1mil and Covid-19 related expenses) came in within expectations, at 79% of our full-year forecast and 76% of full-year consensus estimates respectively.

• Pecca’s automotive (car seat division) top line was up 20% YoY in 9MFY21 to RM92.1mil. The OEM segment registered a 9MFY21 revenue of RM76.0mil (+29% YoY), thanks to higher production volumes for the auto sector. This was largely brought about by the encouraging demand due to the SST exemption in the domestic market and the fact that Pecca is supplying to the Proton X50 (which has an estimated current backlog of about 10 months) and Perodua Ativa. Meanwhile, the REM segment posted a lower 9MFY21 revenue of RM7.5mil (-21% YoY) which we believe was due to lower orders from Singapore and Oceania as a result of Covid-19 dampened consumer spending on big-ticket items (such as vehicles) in the region.

• Pecca’s export businesses dived to RM8.4mil (-46% YoY) in 9MFY21 from RM15.6mil a year ago, predominantly due to weaker contributions across Singapore and Oceania. Based on our calculation, Pecca’s export operations contributed to about 7% of the group’s total top line in 9MFY21.

• Pecca’s PPE segment recorded a 9MFY21 revenue of RM11.2mil, contributing to 10% of total top line. On a quarterly basis, we believe that it will be difficult to further grow this segment due to the current oversupply of face masks and PPE products in the domestic market. To add on further, the ceiling prices for face masks have been capped at RM0.70 from RM1.00 – effective 1 Nov 2020 – potentially squeezing selling prices for both manufacturers and distributors in Malaysia.

• The group’s net cash position stood at RM68.5mil (or RM0.37/share) as at 31 Mar 2021.

• While we are comfortable on Pecca’s immediate outlook due to: i) the ongoing SST exemption, which will bolster consumer demand for vehicles; and ii) Proton’s steady growth and Perodua’s dominance in the domestic auto sector, we believe the valuations are excessive and have gone way ahead of fundamentals at 35–34x FY21–22F earnings. Hence, our downgrade to UNDERWEIGHT.

Source: AmInvest Research - 24 May 2021