Pecca reported 1QFY19 PATMI of RM3.3m (+37.5 QoQ, +15.4% YoY), within our expectation. The stronger earnings were mainly due to improved group margin on higher sales mix from REM and PDI markets (including exports). Maintain BUY recommendation with unchanged TP of RM1.35 based on 13x P/E on FY20 EPS.

Within expectation. Despite the production disruption of major client Perodua (for Myvi model in Sep), Pecca reported a strong core PATMI of RM3.3m for 1QFY19, achieving 22.4% of our FY19 forecast and 25.6% of consensus. We expect stronger earnings in the following quarters, with the normalization of Myvi production since Oct 2018 and the commencement of new Perodua SUV model by Feb 2019. We have excluded the gain of RM501k from fair value gain of investments (unit trust), RM159k provision for inventories and RM202k of unrealized forex loss.

Dividend. None.

QoQ. Despite a drop in revenue by 7.0%, core PATMI improved by 37.5% on improved sales mix from REM and PDI markets (and lower mix from OEM and leather cut pieces) in the quarter, which fetched higher margins. Group EBITDA margin improved from 11.4% to 18.0%.

YoY: Core PATMI improved by 15.4% on improved sales mix from overall higher leathers seats productions, which fetched higher margins as compare to low value added leather cut pieces production (mainly for Toyota). Group EBITDA margin improved from 14.7% to 18.0%.

Outlook. Pecca is expected to continue leveraging on its major client Perodua sales growth, for the continued strong demand for Myvi model and upcoming new SUV model. The export market has also shown recovery for Singapore (normalization from the tighter emission regulation) and US (following the change in distribution channel).

Forecast. Unchanged as the Results Were Inline.

Maintain BUY, TP: RM1.35. Maintain BUY recommendation on Pecca with unchanged TP: RM1.35 based on PE 13x of FY20 profit. We remain positive on Pecca’s strong operating cash flow of RM16-24m per annum (for FY19-21) on top of its current net cash position of RM97.1m (translating into 52.9 sen/share).

Source: Hong Leong Investment Bank Research - 27 Nov 2018