Investment Highlights

• We maintain BUY on Pecca Group with an FV of RM1.54, pegging the stock to a CY19F PE of 16x.

• Key points from the analyst briefing on Friday:

1) MD and founder Datuk Teoh Hwa Cheng takes the reigns. This follows Tan Jin Sun’s departure as the group executive director and CEO of PLeather. Teoh has over two decades of experience in the leather goods sector and holds a 51.3% stake in Pecca (with a 5.5% direct stake and 45.8% indirect stake via MRZ Leather Holdings). He has steered the group’s long-term strategic planning and the expansion of its core business. Management guided that the role of PLeather CEO will be distributed among several individuals, with Teoh focussing on the manufacturing operations and supplier contracts.

2) A number of lagging factors in 3Q has started to normalize. Recall that the group’s key segment (OEM) saw strong orders in the 3Q, but net profit fell on three other factors: weaker orders for its PDI and exports segments, higher labour and maintenance costs and a higher effective tax rate. Management guided that exports to Singapore (making up the bulk of the “rest of Asia” region for the group) had bounced back and labour costs that previously spiked from overtime payments (due to ad hoc orders from one customer) had also started to normalise.

• We believe that the group’s earnings in the coming quarter and FY19 will reflect a stronger 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.

• 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.

Source: AmInvest Research - 28 May 2018