Post FY19 briefing, we remain positive on the group’s outlook from sustainable domestic sales (driven by Perodua) and improving export markets. We expect higher dividend payout in FY19 following improved earnings by 64.2% YoY. Maintain BUY recommendation with unchanged TP of RM1.40, based on PE 13x of FY20 profit.

FY19 earnings recap. The strong growth in FY19 earnings by 64.2% YoY, was mainly due to 38.8% YoY higher overall car seat covers sales volume, driven mainly by Perodua and Nissan as well as export market.

Domestic volume to sustain. Management guided volume to sustain for FY20, supported by the continuous demand from Perodua for both Myvi and Aruz models. The upcoming launch on updated Axia will also support sales growth of Pecca. Pecca management is also exploring new programs with Proton, given the latter’s strong sales growth for the past 6 month.

Exploring export market. Revenue from export market also showed growth of 16.9% YoY, driven mainly by Asia, Europe and US, as Pecca continued to expand market coverage. Pecca has also started to supply leather pieces to Subaru OEM in China in 4QFY19, compensating the declining volume to Toyota OEM in Malaysia.

New staff incentive program. Management has decided to reward employees and staffs who have been contributing to the growth of the company, by establishing a new staff incentive program. Pecca has recognised RM2.5m in 4QFY19 alone, and expects the amount to be between RM2-2.5m on annual basis depending on the company’s performance.

M&A plan still on. M&A proposals are being scrutinized, pending further review. Management is hopeful to conclude the M&A exercise by year end. To recap, the targeted M&A is related to the automotive sector. Its cash coffers of RM92.8m would be sufficient to finance the M&A exercise.

Aviation. Pecca’s PAviation is still unable to provide leather refurbishment services to the aviation sector pending the required licensing. The application for EASA (European Aviation Safety Agency) license is targeted to be fulfilled by end 2019, eventually allowing Pecca to penetrate into the lucrative market of aviation leather seats.

Dividend. Management assured that the company’s dividend payout policy is still intact. Pending approval, Pecca will announce a second interim dividend in coming weeks, after a first interim dividend of 2.5sen in 1HFY19.

Forecast. Unchanged.

Maintain BUY, TP: RM1.40. Maintain BUY recommendation on Pecca with unchanged TP of RM1.40 based on PE 13x of FY20 profit. We remain positive on Pecca’s strong operating cash flow of RM22-25m per annum (for FY20-21) on top of its current net cash position of RM92.8m (translating into 50.6 sen/share).

Source: Hong Leong Investment Bank Research - 28 Aug 2019