Investment Highlights

• We maintain BUY on Pecca Group but cut our FV to RM1.54/share from RM1.70/share pegging the stock to an unchanged CY19F PE of 16x.

• We reduced our FY18-20 projections by 10-12% by adjusting margins for higher operating costs after the 3QFY18 earnings fell below expectations. 9MFY18 results met 52% of our FY projection and 49% of consensus.

• We projected for a sequentially flat 3Q as volume gains from the Perodua Myvi would kick in more visibly from 4Q. The 3QFY18 core net profit of RM2mil was 35% lower QoQ due to three factors — weaker orders for its PDI and exports segments, a lower gross margin due to higher labour and maintenance costs, and a lower effective tax rate in the previous corresponding period.

• Revenue was supported by strong orders from the local OEM segment, which accounted for two thirds of its topline and mitigated the weakness in the other segments. OEM revenue was 55% higher YoY as its top two customers (Perodua and Toyota) raised production by 44% YoY and 17% YoY respectively.

• 9MFY18 revenue fell 8% YoY while core net profit fell 37% YoY. We believe the two main factors were the lopsided revenue contribution (FY17 benefited from the launch of the Perodua Bezza at the start of the year, whereas FY18 will see stronger support from the Perodua Myvi in its second half) and higher operational costs.

• We believe that the group’s earnings in the coming quarter and FY19 will reflect more strongly the contribution from the Perodua Myvi.

• The strong pipeline for the Myvi will be positive for Pecca. Recall that the production of Myvi was recalibrated to accommodate the market preference for the 1.5L variants, for which 50-55% are equipped with leather seats. Buyers of the 1.5L have faced a waiting time of 3 months as a result, and Perodua recently announced that only 55% of bookings to date had been fulfilled (it had 70K bookings against 38% deliveries at end-April).

• We believe Perodua will push forward more strongly the popular Myvi in coming months, leveraging the transition period before the SST is reintroduced and ahead of the margin-oriented SUV eyed for later this year or 2019. Pecca will supply half of the leather seat covers for the Perodua SUV.

• 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 from diversifying from the auto segment and domestic market; (3) a beneficiary of a stronger ringgit eventually given its exposure to USD-settled leather hides; (4) clean financials and a potential upside to yields of 3- 4% given its net cash position and minimal capex.

Source: AmInvest Research - 25 May 2018