Pecca commands a dominant position (over 60% market share) in the automotive leather upholstery segment. We are positive on the stock amid improving sales for both domestic (driven by Perodua) and resilient exports (driven by key markets in Singapore and US). Pecca’s 50% meltdown in share price from 52W high is irrational and has made it an attractive value proposition as earnings recovery is set to normalise, supported by a strong FY18-21 EPS CAGR of 23%, cheap valuations at 8.1x FY20 P/E (46% discount to average 15x P/E since listed), solid net cash of 51.6sen per share (~63% of share price) and strong DY of 7.3-12.2% for FY19-21. Pecca is also a beneficiary of recent RM strength as it imports majority of its raw materials in US$ while exports only contribute on average 18% to revenue.

Domestic volume to grow. Perodua Myvi production has resumed with higher scheduled volume up until April 2019, which will benefit Pecca. Its production for Myvi model is expected to breach 6,000 sets in Nov 2018 and expected to average 4,500 sets/ month until Apr 2019, as compared to average 3,500 sets/month previously. Production for the new Perodua SUV model is expected to commence in Dec 2018, prior to official car launch in mid 1QCY19. Nevertheless, sales to other OEMs are expected to normalize in coming quarters.

Stable exports volume. Exports volume to Singapore and US has shown some recovery in 1QFY19. Management expect both markets’ volume to be sustainable in the coming quarters, which will enhance overall group margin, given that export prices are c.30% higher than local prices.

Delay in M&A. Existing M&A proposals have again been revised, pending further review as management sought to ensure the exercise will be value accretive to shareholders. Its cash coffers of RM97.1m would be sufficient to finance the M&A exercise.

HLIB maintains BUY rating with RM1.35 TP (+64.6% upside), 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 51.6 sen/share). Pecca’s 50% meltdown in share price from 52W high is irrational and has made it an attractive value proposition as earnings recovery is set to normalise, supported by a strong FY18-21 EPS CAGR of 23%, cheap valuations at 8.1x FY20 P/E (46% discount to average 15x P/E since listed) and strong DY of 7.3- 12.2% for FY19-21.

Double bottom formation with a potential neckline breakout above RM0.83. PECCA has been trending sideways over the past 2 months between the RM0.685- 0.83 levels, while the MACD Indicator has been showing the bullish divergence signal. Also, the MACD Line continues to trend higher in November 2018 and traded volumes have started to pick up following a short term breakout above RM0.735. Hence, we believe the momentum is building up and may surge above RM0.83 and buying support may lift the prices towards RM0.89 (200d SMA)-0.94 (50w SMA), followed by a LT target of RM1.00. Support will be at RM0.755 (50d SMA)-0.78 (100d SMA). Cut loss will be set around RM0.735.
 

Source: Hong Leong Investment Bank Research - 16 Jan 2019