Results

• Within Expectation – Reported core PATAMI of RM3.9m for 4Q17 and RM15.3m for FY17 (excluded deferred tax expenses of RM1.1m in 4Q17), which was 98.0% of HLIB forecast and 95.6% of consensus.

Deviations

• None.

Dividends

• Proposed final dividend of 3 sen/share, bringing full year dividend to 5 sen/share, higher than HLIB expectation and consensus of 4 sen/share.

Highlights

• YoY : Group revenue dropped by 5.4% YoY, mainly dragged by lower leather pieces sales (lower margins) on lower demand from Toyota production line. However, core profit rose by 37.4% on improved sales mix from car seats (OEM & PDI) and other segments, higher net finance income as well as lower adjusted tax (excluded RM1.1m deferred tax).

• QoQ : Earnings improved significantly by 69.9% on overall group sales improvement by 25.7%.

• FY17 : Revenue dropped marginally by 3.3% on lower contribution from car seats segment, affected by lower demand from OEM Perodua and Proton. Combined with the impact from lagged recognition of cost past-through for RM depreciation, core earnings dropped by 15.9%.

• Outlook : Pecca is expected to leverage on the recovery of automotive sales and production volume as well as increasing leather programs as the competitions among automotive OEMs intensify while consumers increasingly being pampered with promotional leather products. Furthermore, the aviation segment is expected to gain momentum as Pecca Aviation Services gradually gains recognitions from domestic airlines.

Risks

• Increase in cow leather hide price.

• Continuous depreciation of RM.

• Margin squeeze by OEM clients.

Forecasts

• Maintain FY18-19 earnings. Introduce FY20 earning forecast at RM21.1m (+7.7% YoY).

Rating

BUY ↔

• We like Pecca for its stable automotive business prospects as automotive players increase production volume and increase leather programs as well new penetration into aviation business. Pecca is expected to generate strong operating cash flow of RM20-24m per annum (for FY18-20) on top of its current net cash position of RM92.7m (translating into 49 sen/share).

Valuation

• Maintain BUY on Pecca with unchanged TP of RM1.88 as we peg P/E of 18.0x on FY19 EPS on stable earnings growth potential, net cash of over RM90.0m (ex-cash P/E of ~13.0x for FY19), and potentially higher dividend payout.

Source: Hong Leong Investment Bank Research - 23 Aug 2017