Highlights/ Comments

• The drop in FY17 earnings was mainly due to lower than expected sales of Perodua Bezza and slower production volume for Proton Exora and Iriz.

• Outlook for FY18 remains encouraging with seat sales growth mainly driven by Perodua’s new MyVi model (to be launched by 4QCY17), higher values from Toyota (higher direct leather programs), new leather programs by Mitsubishi as well as increasing export markets (especially into Singapore and USA).

• Sales outlook of Perodua (contributed 34.5% of Pecca revenue in FY17) looks positive in coming years with attractive new model line-ups planned for 2017-2019. Furthermore, Perodua is also exploring to expand its export market (leveraging on the new models) over the years.

• Second largest customer Toyota (contributed 20.8% of revenue) is also exploring to outsource the whole seats leather/fabric value chain to Pecca (vs. Pecca supplying only leather cut pieces to Toyota currently, which fetches lower margins).

• PAviation is also gaining momentum with higher value contracts being secured from private and commercial airlines operator with minimal incremental costs. Management expects turnaround of this subsidiary in FY18 from loss of circa RM360k in FY17.

• Pecca also managed to secure contracts for leather and vinyl (PVC) leather programs from Ferco Seating for cinemas in Malaysia and overseas, further enhancing the group’s earnings in FY18.

• The company has started share buy-back exercise since May 2017 in view of management confidence of the company’s prospects amid healthy cash level. YTD, The company has cumulatively bought back 472k treasury shares from the market within price range of RM1.48-1.52/share.

Risks

• Increase in cow leather hide price.

• Continuous depreciation of RM.

• Margin squeeze by OEM clients.

Forecasts

• We raise our earnings forecast for FY18-20 by +3.1%, +1.9% and +0.8%.

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 higher TP RM1.90 (from RM1.88) as we peg 18.0x P/E on FY19 EPS on stable earnings growth, 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 - 24 Aug 2017