Our recent management update meeting has reaffirmed our positive view on Pecca’s outlook from the strong domestic automotive sales (driven by SST exemptions from 15 Jun to 31 Dec 2020) and ramping of PPE productions by year end (driven by strong demand on the outbreak of Covid-19). We expect an attractive dividend payout of 8.0 sen for FY21-22 (translating into 5.5% yield). Maintain BUY recommendation with unchanged TP of RM1.75, based on unchanged PE 12x on FY21 profits.

We recently had a virtual meeting with Pecca for an update of the group’s operation with the following key takeaways:

Leather car seats. Management guided production rate has normalised back to 10- 12k sets/mth since Sept (from 9-10k sets/mth in Jul-Aug period) and expects the volume to sustain until year end. The group is benefiting from the increasing TIV driven by SST exemption measures (delivery period up to end Jan 2021). Perodua has increased its production to average 25k/mth for Aug-Dec period (vs. usual 20k/mth), while Toyota confirmed to increase its production rate for the same period. The recent introduction of attractive new models e.g. Proton X50 (Oct 2020) and Mitsubishi Xpander (Oct 2020), and upcoming Perodua D55L (early-2020) will also benefit Pecca. Management expects TIV to remain resilient into 2021, driven by: 1) attractive new models; 2) low interest rate environment; and 3) gradual shift of consumer preference from public transportation to private cars for social distancing.

New PPE. Pecca has managed to increase its production of 3-ply mask to 15m/mth (180m/yr) in Oct and targets to ramp up production to 50m/mth (600m/yr) by end-2020 due to indicative strong demand orders from both domestic and export markets. Pecca has obtained the ISO13485:2016 Quality Management System Certificate (design, development and manufacturing of PPE) and received certifications from Malaysia’s MDA (local distribution), the U.S. FDA (export) and EU CE Marking (export). The commercial production of N95 mask and other PPE items will commence at a later stage. Despite the recent drop in price ceiling to 70sen/piece (from RM1.00/piece), we expect Pecca to be able to maintain its gross margins for the segment at double digits. Management expects the new segment to generate material earning contribution to the group. PPE segment has now become a long term venture for Pecca, as the group expects continued high demand for PPE products even after vaccine being introduced due to increasing hygiene awareness.

M&A plan still on. Management has recently resumed their assessment for M&A opportunities after being affected by Covid-19 and implementation of MCO during early 2020. We maintain our expectation for Pecca to only conclude the M&A exercise in 2021. To recap, the targeted M&A is related to the automotive sector. Management is likely to fund the acquisition via combination of internal fund (net cash RM78.4m as at end FY20) and debt.

Dividend. Management assured that the company’s dividend payout policy is still intact. We expect Pecca to distribute 8.0 sen for FY21-22, translating into 5.5% dividend yield). The group has a net cash of RM78.4m (translating into 44.2 sen/share).

Forecast. Unchanged.

Maintain BUY, TP: RM1.75. Reiterate BUY recommendation on Pecca with unchanged TP of RM1.75 based on PE 12x on CY21 profit. We are positive on Pecca’s leverage on the strong rebound in TIV during SST exemption period as well as the new PPE venture, promising strong earnings rebound and decent dividend of 8.0 sen/share (5.5% yield) in FY21

Source: Hong Leong Investment Bank Research - 2 Nov 2020