Investment Highlights

• We maintain BUY on Pecca Group with an unchanged FV of RM1.10/share based on a CY19F PE of 15x.

• Key points from the analyst briefing on Friday:

1) Export earnings to rebound from stronger sales to Singapore this quarter. Exports accounted for 17% of FY18 group revenue and fell 22% YoY, mitigating some gains seen from higher Perodua sales. Management guided that sales to Singapore (accounted for in the REM segment) began to normalize from August after carmakers took time to adapt to stricter regulations on emissions that were implemented earlier this year.

2) Margins to improve from better Myvi planning and the stronger exports. Recall that its net margin dropped nearly 3ppts to 9% in FY18 on suboptimal cost management and lower exports in 2H. Margins should improve from a more coherent production plan for the Myvi and the boost in exports, from which Pecca earns an ASP that is higher by a third when compared to its local ASP.

3) The SST should have minimal impact on Pecca as auto parts and car components for CKD cars are exempted from the tax. The SST would only be charged on its local REM sales which form a small part of the group’s revenue. We note that Pecca sales would still be affected by the lower car sales resulting from higher car prices when the SST returns next month.

4) Eyeing growth by M&A in 2019. Management reiterated that it is eyeing targets to expand its core competencies in auto and leather. Current targets could tap on the RM91mil reserve it has (comprising RM14mil in cash and RM77mil in short and long-term funds) but fundraising may be required for working capital to grow an acquisition. We believe the group is cognizant about taking on an earnings base and debt level that it can sustain. We believe M&A would best serve to open up new markets or customers for Pecca, given the maturity of the local market and its already strong relationship to the key OEMs here.

• Pecca should see support from higher car sales in the current quarter and the Perodua SUV anticipated later this year. We believe efforts to restore export sales and margins will serve to place Pecca in a stronger position.

Source: AmInvest Research - 27 Aug 2018