Pecca reported strong earnings rebound in 1QFY21 PATMI at RM5.2m (+216.7% QoQ; +11.9% YoY) mainly driven by recovery of car seats productions and continuous cost cutting measures (until end 2020). The results were within HLIB expectation (20.6%), but above consensus (30.3%). We expect further earnings expansion in coming 2QFY21 (leveraging on the strong automotive demand prior to ending of SST exemption by end 2020 and ramping up contribution from PPE manufacturing), while 2HFY21 may see some slowdown in automotive demand (partially offset by new model introductions by OEM clients). Maintain BUY recommendation with unchanged TP of RM1.75 based on unchanged 12x P/E on CY21 profit. The group has high net cash position of RM78.0m (41.6sen/share).

Within expectations. Reported a core PATMI of RM5.2m for 1QFY21 (+216.7% QoQ, +11.9% YoY), which we deem in line with HLIB expectation (20.6%), but above consensus (30.3%). The group registered EIs of unrealised forex losses of RM271k, which was offset by gain/reversal of impairments amounting to RM228k for the quarter.

Dividend. None

QoQ. Core earnings improved substantially by 216.7% to RM5.15m, mainly driven by strong recovery of car seats productions segment during the quarter following strong demand for new cars since the implementation of SST exemptions (for passenger cars) and PENJANA stimulus plans from mid-June (vs previous preceding quarter which was impacted by MCO). The quarter also saw new contribution from PPE segment amounting of RM516k revenue and rebound of furniture segment amounting to RM402k revenue.

YoY. Core earnings improved by 11.9% YoY, mainly driven by substantial cost cutting measures implemented (since early 2020) while sales recovered during the quarter. While gross margin was relatively stable, the significant reduction in administrative and distributional costs by RM1.6m to RM2.7m (from RM4.3m) has contributed to bottomline improvement.

Outlook. We continued to expect strong earnings in 4QFY21 due to ongoing strong demand for new cars prior to the ending of SST exemptions by end Dec as well as production ramp up for its new PPE segment. Its major client Perodua announced increasing production rate to 25k units per month (from usual 20k units) for the period of Aug to Dec 2020. However, we may expect some slowdown post 2020 with the ending of SST exemptions, which may be partially cushioned by the launches by several OEM clients during end-2020 and early 2021, i.e. Proton X50 (Oct 20), Mitsubishi Xpander (Nov 20) and Perodua D55L (1QCY21).

Forecast. Post update on annual report, we made minor adjustments to our forecasts for FY21 (-0.4%) and FY22 (-1.6%), and introduce FY23 profit at RM24.6m.

Maintain BUY, TP: RM1.75. Maintain BUY recommendation on Pecca with unchanged TP of RM1.75 based on PE of 12x of CY21 profits. We are positive on Pecca’s strong leverage onto the strong automotive demand during SST exemption period as well as its new PPE venture as Pecca continues to maximise its resource allocation. Pecca boasts a strong net cash position of RM78.0m (translating into 41.6 sen/share).

Source: Hong Leong Investment Bank Research - 30 Nov 2020