Post 4QFY18 briefing, we are more positive on the group’s outlook from improving sales for both domestic and export markets. Management is guiding for higher dividend in FY19 following the higher earnings expectation. The upcoming M&A exercise will be financed internally and management assured to be value accretive to shareholders. Maintain BUY recommendation with unchanged TP of RM1.35.

FY18 earnings. Pecca experienced a slow FY18, affected by lower sales volume from both domestic and export markets, as well as increase in labour costs (due to foreign labour levy and higher overtime) and maintenance costs.

Domestic volume to grow. Sales order from Perodua is still going strong especially for the Myvi model. Management expects further efficiency gain from the model, which will improve margin in coming quarters. New anticipated models include the new Perodua SUV in 4Q18.

Export volume to improve. Export volume to Singapore and US are expected to recover in FY19 after weak sales flow in FY18, being dragged by Singapore’s stricter vehicle emission scheme and change in US distribution channel. The volume increase will improve overall group margin, given that export prices are c.30% higher than local prices.

Potential M&A. Management is targeting an M&A exercise (related to automotive industry) by end 2019, pending further due diligence. Its cash coffers of RM91m would be sufficient to finance the M&A exercise. Management assured that the acquisition would be value accretive to shareholders.

Aviation. Further delay can be expected for the aviation segment given the continued delay from DCA’s process in granting the POA (Production Organisation Approval), which will enable PAviation to officially commence commercial aviation refurbishment contracts.

Stable dividend. Management has upheld its promise to maintain final dividend of 3.0 sen/share (total 5.0 sen/share for FY06/18) despite the lower earnings, given the company’s strong free cash flow of RM13m (6.9 sen/share). Even with the upcoming targeted M&A exercise, management is expecting higher dividend in upcoming financial years on stronger earning expectation.

Forecast. We cut earnings for FY19-20 by 12.2% and 9.1% following the delay in PAviation contracts and lower group margin assumptions. We introduce FY21 earning at RM20.4m. We have not included the potential earnings accretion from the expected M&A exercise.

Maintain BUY, TP: RM1.35. We maintain our BUY recommendation with unchanged TP, rolling forward our valuation into FY20, pegged to lower PE 13x (from 15x). Pecca has strong operating cash flow of RM16-24m per annum (for FY19-21) on top of its current net cash position of RM91m (translating into 49.6 sen/share).

Source: Hong Leong Investment Bank Research - 27 Aug 2018