Investment Highlights

• We maintain BUY on Pecca Group but cut our FV to RM1.10/share (from RM1.54/share) as our FY19-20 projections are trimmed by 26% and we lower our CY19F PE by one notch to 15x.

• FY18 core net profit of RM10.1mil came below expectations, meeting 77% of our forecast and 88% of consensus. Its final two quarters saw the benefit of stronger OEM orders from production of the Myvi though mitigated by weaker PDI and REM sales.

• Gains from higher Perodua car sales (up 17%YoY in 2HFY18) also helped offset lower results seen by Pecca’s other key OEM clients, which were met with tepid demand in 1HCY18 as consumers held back from purchases prior to the election.

• The 4QFY18 rebounded sequentially but net profit was weaker 8% YoY. Margins benefited from a better management of its input and operating costs, the latter partly from a more coherent production plan for the Myvi. This resulted in lower overtime costs for Pecca.

• However, stronger OEM sales (from the new Myvi) was offset by weaker PDI & REM orders which were substantially lower on a YoY basis. On the whole, domestic sales were down 1% YoY while exports fell 33% YoY.

• In FY18, its core net profit tumbled 32%YoY. We trace this back to the revenue drop (stemming from lower PDI sales and REM or export sales) and a margin erosion in the 2H due to suboptimal cost management.

• Dividends proposed in FY18 totalled 5.0 sen/share, which was the same amount from the previous year but a higher payout of 92% vs. 63% in FY17. We project a dividend payout of 65% in the coming years, resulting in a yield of 5.4% based on the current share price.

• Going forward, we believe margins should continue to improve as Perodua finds its groove with the Myvi production. Also, Pecca’s revenue will see support from the higher car sales in the current quarter and the Perodua SUV anticipated later this year or early 2019. However, we believe the group is in need of a strategy to halt the retreat in Pecca’s exports, especially to Singapore.

Source: AmInvest Research - 24 Aug 2018