Investment Highlights

• We maintain a BUY call and a slightly lower FV of RM1.70/share (from RM1.80/share) on Pecca Group based on an FY19F PE of 16x. We trim our FY18-19F projection by 3-8% to factor in a weak 1Q and slightly less bullish outlook for OEM sales.

• 1Q18 (July-Sept) results were below expectations as they accounted for only 16% of our and consensus projections. Revenue (-15% YoY) and net profit (-37% YoY) fell on lower sales to its OEM clients.

• Of its 5 most important OEM clients, we note that the top 3 (Perodua, Nissan and Toyota) saw vehicle sales during the quarter drop on a YoY basis, while the next two (Proton and Honda) improved visibly.

• Perodua, the group's most important OEM (accounted for 44% of car seats sold to OEM by Pecca in its last FY), saw its sales declined 3% YoY on two timing-related factors: the previous corresponding period benefited from the launch of the Bezza (mid-July' 16), while 1Q18 sales of the Myvi were subdued on anticipation of the third-gen's launch this month.

• While its 1Q has disappointed, we expect its earnings for the next two quarters to rebound with better sales to its key OEM clients. 2Q especially will see the support of the new Myvi and a seasonal upswing for car sales.

• Margins remain formidable (25% gross, 10% net) and financials are still clean (zero borrowings, net to RM98mil in cash).

• The path forward looks promising, with a better outlook for the auto segment: 9MCY17 sales for the relevant autos were either flat or improved (Perodua: flat, Toyota: +11% YoY, Honda: +24% YoY, Proton: +12% YoY) with the exception of Nissan (-32% YoY).

• We remain positive on Pecca on the following strengths: (1) topline to ride on TIV recovery, anchored to its relationship to Perodua; (2) long-term growth to be unlocked from diversifying from the auto segment and domestic market; (3) a beneficiary of a stronger Ringgit given its exposure to USD-settled leather hides; (4) clean financials and potential upside to yields of 2-4% from a higher payout given the net cash position, minimal capex and redirection of IPO funds to working capital.

Source: AmInvest Research - 29 Nov 2017