Investment Highlights

• We maintain our UNDERWEIGHT recommendation on Pecca Group (Pecca) with a lower fair value (FV) of RM1.65/share (from RM1.99/share) based on 13x target PER of revised FY23F earnings (from FY22F). We reduce FY22F–23F earnings by 14%, imputing lower sales and margin assumptions. There is no ESG-related adjustments to our FV (Exhibit 3).

• Pecca’s 1HFY22 core net profit of RM6.5mil came in below our and consensus expectations, at 28% of our and consensus full-year forecast. The negative surprise is mainly attributed to lower-than-expected sales from the pent-up demand and weak gross profit margin.

• Pecca’s automotive’s (car seat division) top line fell 15% YoY in 1HFY22 to RM56.4mil. The OEM segment registered a 1HFY22 revenue of RM38.6mil (-22% YoY) due to weaker lower industry sales volume during the movement control order period in 1QFY22. Meanwhile, the REM segment posted a marginally lower 1HFY22 revenue of RM4.6mil (- 3% YoY) which we believe was due to fewer orders from Malaysia and the rest of Asia, but partially offset by orders from Europe, North America and Oceania.

• Pecca’s export businesses grew 6% to RM5.5mil in 1HFY22, but still far off from the pre-pandemic level of RM19mil–RM22mil range. Export sales contributed about 8% of the group’s total revenue in 1HFY22.

• Pecca’s PPE segment recorded a 1HFY22 revenue of RM11.3mil, contributing 17% of the group’s total revenue. On a quarterly basis, the segment’s sales declined 26% in 2QFY22. We believe this could be partly due to the oversupply of face masks and PPE products in the domestic market.

• The group’s net cash position stood at RM67.6mil (or RM0.36/share) as at 31 Dec 2021.

• Valuation looks steep. 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 29.6–25.6x FY22F–23F earnings.

Source: AmInvest Research - 28 Feb 2022