Highlights/ Comments

• The weak performance in 1H18 was mainly due to lower than expected sales demand from Perodua, on the destocking exercise of Perodua (phase out of the old MyVi model) and followed by Perodua’s mismatch of production mix and consumer demand for the new MyVi.

• The demand from other major clients – Nissan and Proton also continued to be weak due to lack of new models and loss of consumer confidence.

• The weak car seat demand was partially offset by the higher demand for leather cut pieces from Toyota. However, leather cut pieces fetch lower margins.

• Management guided for car seat sales to improve in 2H18, mainly driven by the gradual production ramp up of Perodua’s new MyVi model, which is currently constrained by some of the supplier’s ability to increase production.

• Sales outlook of Perodua (contributed 34.5% of Pecca revenue in FY17) looks positive in coming years with new line up of Alza facelift and new SUV planned for 2018. Furthermore, Perodua is also exploring to expand its export market (leveraging on the new models) over the years.

• The contracts for PAviation have been deferred further to FY19, following DCA requiring PAviation to obtain another POA (Production Organization Approval) certification. Management expects turnaround of this subsidiary in FY19 with the contribution from new contracts (for commercial aircrafts) from loss of circa RM360k in FY17.

• The company continued its share buy-back exercise in 2Q18 in view of management confidence of the company’s prospects amid healthy cash level. YTD, the company has cumulatively bought back 2.2m treasury shares from the market at average price of RM1.37/share in 2Q18.

Risks

• Increase in cow leather hide price.

• Continuous depreciation of RM.

• Margin squeeze by OEM clients.

Forecasts

• We cut earnings for FY18 by 13.4% and FY19 by 4.2%, but raised FY20 by 1.1%, following the lower than expected sales volume in FY18 and deferment of PAviation contracts.

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 lower TP RM1.72 (from RM1.95) as we peg 16.0x P/E (previously 18x) on CY19 EPS on stable earnings growth, net cash of over RM90.0m (ex cash P/E of ~12.0x for CY19), and potentially higher dividend payout.

Source: Hong Leong Investment Bank Research - 1 Mar 2018