Pecca is diversifying into manufacturing and supplying of PPE, commencing operation by end July/early August 2020, as the group seeks to maximise its resources allocation. The new venture will be able to cushion the temporary slowdown of its automotive leather segment. The automotive leather production has yet to recover back to pre-MCO level at this juncture. The segment is expected to leverage onto SST exemptions, boosting TIV in 2HCY20. We expect dividend payout in FY20 to stay at 6.0sen (translating into 6.6% yield). Maintain BUY recommendation with unchanged TP of RM1.28, based on unchanged PE 12x on CY21 profits.

New PPE venture. Pecca is diversifying into PPE (Personal Protective Equipment) manufacturing and supplying, given the similarity with its existing automotive leather manufacturing business. The budgeted RM2.2m capex is to acquire new machineries (build new 2 production lines), repurpose existing production lines (converting existing 2 production lines) and setup new cleanroom facilities. The new operation is expected to commence by end July/early August 2020 and production can be easily ramp up within 2 weeks. They are already in talks with few key distributors of healthcare and pharmaceutical industries and expect to finalise contracts soon. Pecca is starting with the domestic market for now and potentially exploring export markets.

Automotive leather. Based on current schedule, management indicated production for automotive leather has yet to recover to pre-MCO period, despite the recent introduction of SST exemption measures for new passenger cars. Nevertheless, we expect a more gradual pick up in automotive sales as business activities recover from MCO and Covid-19. Management indicated the group is a contender to supply for the new Perodua and Proton model launches in 2HCY20.

Dividend. Management assured that the group’s dividend payout policy is still intact. We expect Pecca to distribute a final dividend of 3.0sen for 2HFY20, accomplishing a full year 6.0sen for FY20 (translating into 6.6% dividend yield). The group has a net cash of RM91.0m (translating into 50.7 sen/share).

Forecast. Unchanged, as we expect the new PPE contribution to negate the lower production of automotive leather segment as well as delay in new model programs.

Maintain BUY, TP: RM1.28. Maintain BUY recommendation on Pecca with unchanged TP of RM1.28 based on PE of 12x of CY21 profits. We are positive on the new PPE venture as Pecca continues to maximise its resource allocation. We expect the automotive industry to benefit from SST exemption measures. Pecca boasts a strong net cash position of RM91.0m (translating into 50.7 sen/share).

Source: Hong Leong Investment Bank Research - 1 Jul 2020