Pecca reported 9MFY18 PATMI of RM8.3m (-26.9% YoY), below HLIB expectation due to lower sales volume, weaker sales mix from export market and higher maintenance and direct labour costs. The high direct cost is expected to normalize in following quarters. We cut earnings for FY18, FY19 and FY20 by 27.7%, 11.2% and 2.8% respectively. Maintain BUY recommendation with lower TP: RM1.35 (from RM1.72) based on PE 15x FY19 EPS.

Below expectation. Reported core PATMI of RM2.6m for 3QFY18 and RM8.3m for 9MFY18, achieving 53.9% of HLIB’s FY18 forecast and 52.1% of consensus. The weaker than expected core PATMI was due to lower than expected sales volume, lower sales mix from export market and higher maintenance and direct labour costs.

QoQ. Despite the higher sales volume and revenue, core PATMI dropped 9.4% on: (1) lower sales mix from export and PDI market; and (2) higher maintenance cost and direct labour costs (higher levy costs for foreign labour and overtime costs).

YoY: Core PATMI increased 13.2% on higher sales revenue and lower depreciation charges.

YTD: Core PATMI declined 26.9% on lower 9MFY18 sales volume and higher direct costs related to labour and maintenance.

Outlook. Pecca is expected to continue leverage on major client Perodua on continued strong demand for Perodua models in the near term, and potentially benefit from the restructuring of Proton with Geely in the longer term. The unusual high maintenance cost and labour cost is expected to normalize in the following quarters, as Pecca works on a more scheduled production plan with Perodua.

Share buyback: Pecca continued to exercise its share buyback exercise since 4QFY17, and as of to-date, the accumulated buyback is 4.25m treasury shares or 2.6% of its issued share base.

Forecast. Cut PATMI forecasts for FY18, FY19 and FY20 by 27.7%, 11.2% and 2.8%, as we impute lower sales volume and margins especially in FY18 and FY19.

Maintain BUY, TP: RM1.35. Post earnings adjustment, we cut TP to RM1.35 (from RM1.72) based on PE 15x of FY19 profit. We maintain our BUY recommendation on Pecca given strong operating cash flow of RM16-20m per annum (for FY18-20) on top of its current net cash position of RM90.3m (translating into 48 sen/share).

Source: Hong Leong Investment Bank Research - 25 May 2018