Investment Highlights

• We maintain BUY and an FV of RM1.70/share for Pecca Group based on an FY19F PE of 16x.

• Net profit for 1HFY18 (July-Dec 2017) of RM6mil met 34% of our FY projection and 31% of consensus. We maintain our numbers on the expectation of a stronger 2H18.

• 1HFY18 revenue fell 18% as sales to OEM shed by a third. Sales to OEM remains the most important area, accounting for 56% of its sales of car seat covers; and Malaysia accounts for 82% of its revenue.

• Of its 5 most important OEM clients, only Honda saw a YoY improvement in its 1HFY18 car sales while Perodua, Nissan, Toyota and Proton saw declines. However, we note that only 2 of them (Proton and Nissan) had missed out on a QoQ improvement in 2QFY18.

• For Perodua, the previous corresponding period (1HFY17 or July-Dec 2016) saw the introduction and immediate sales impact of the Bezza. Perodua sales should strengthen from this quarter with the new Myvi, for which it has delivered less than half of the total number of units ordered so far.

• Margins were intact in the past two quarters, though they were lower on a YoY basis given that the ringgit began to weaken after 2Q17 (from early 2017). Even at its low, Pecca's net margin of 10% remains more compelling than those seen for other parts makers, as well as OEMs and distributors. The stronger MYR from this quarter should provide some reprieve given that 40% of its costs are in USD from buying leather hides.

• Its dividend yield of ~3% is supported by a continuing net cash position, position of zero borrowings, minimal capex and redirection of IPO funds into working capital.

• We deem the challenge for the next quarters for Pecca to be: (1) to ride on the stronger sales of the more aggressive OEM clients, while mitigating the impact of lower numbers from Proton and Nissan; (2) to achieve stronger growth for its exports (REM) markets; (3) to derive new revenue sources for its long term from expanding beyond its core business and market.

Source: AmInvest Research - 28 Feb 2018