Investment Highlights

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

• We cut our FY18F projection by 12% or RM2mil on expectation of a flat third quarter, and maintain our FY19-20 numbers. Management guided that the volume gains from the new Myvi will be more visible from its 4Q (April-June 2018), as production shifts to accommodate the market preference for the 1.5L variants.

• Perodua had projected for bookings to lean towards the 1.3L variants (expecting a ratio of 65:35 for 1.3L and 1.5L) but immediate sales pointed to a preference for the 1.5L (with a ratio 85:15). It decided to redirect production to the 1.5L after discussions with the main vendors but several of them emphasized that they needed up to March to fully adapt.

• A bigger sales volume for the 1.5L would benefit Pecca, as about 50-55% of the 1.5L Myvi is equipped with leather seats (the number spiked to 67% in the recent month, but is expected to normalise). We note that Pecca is currently the sole supplier of leather seat covers to Perodua, which is its top OEM customer having accounted for 32% of its recent car seat cover sales.

• Management guided that it will supply for half of the leather car seat covers for the Perodua SUV, which is expected to begin production at the end of this year. Perodua could implement a dual-vendor sourcing programme from the SUV onwards.

• We understand that up to a fifth of the new SUV could have leather seats and we believe Perodua may make the bold move of prioritizing margins to sales volume, which is targeted at about 2K/month. We are positive on Perodua's sensible move to distinguish the first national SUV from the price and volume usually seen for the cheaper hatchbacks and sedans.

• 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 ~3% from a higher payout given the net cash position, minimal capex and redirection of IPO funds to 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 the long term from expanding beyond its core business and market.

Source: AmInvest Research - 5 Mar 2018