Post 1QFY21 briefing, we remain positive on Pecca’s strong earnings for upcoming 2QFY21 (leverage onto the strong TIV during SST exemption period). For subsequent quarters, we are expecting some slowdown in car demand, which will be partially cushioned by new model launches by major OEM clients i.e. Perodua D55L, Proton X50 and Mitsubishi Xpander. Pecca is also ramping up PPE manufacturing due to the current strong demand from both domestic and export markets. While we flag the concern of RPT involving the distribution of Pecca’s PPE products by its director’s private arm, management clarified it is based on an arm’s length agreement and Pecca will only focus on manufacturing. Maintain BUY recommendation with unchanged TP of RM1.75, based on PE 12x on CY21 profit.

1QFY21 earnings recap. 1QFY21 PATMI rebounded strongly by +216.7% QoQ to RM5.2m mainly driven by recovery of car seats production. On YoY basis, the growth was +11.9%, due to on-going cost cutting austerity measures (implemented since early 2020) as well as existing support of government wage subsidy program during the quarter.

Leather car seats. Management guided production rate has is at high of 11-12k sets/mth in 2QFY21 due to strong demand for new cars prior to the end of SST exemptions (31 Dec). For subsequent quarters, management expects production to match back pre-MCO levels at 10-11k sets/mth, driven by new launches by major OEM clients – Perodua D55L, Proton X50 and Mitsubishi Xpander. At the same time, Pecca’s export of leather cut pieces to China NJTC (Subaru) has also recovered in 2QFY21, post slowdown in 1QFY21 due to 2nd wave of Covid-19 in China.

New PPE. Since commencement in Aug, Pecca has ramped up the production of 3- ply mask to 20m/mth (240m/yr) and is now targeting for 50m/mth (600m/yr) in 3QFY21 (from initial target by end 2QFY21). Pecca is also diversifying its product range to lifestyle mask, 4-ply mask and N-95 mask to improve its margin. Touching on the “G of ESG” matters, we highlight the concern on related party transaction structure in which the distribution of Pecca’s PPE product is through the director’s private vehicle (Rentas Health, not part of Pecca). Nonetheless, management reassured that the transaction is based on an arm’s length agreement, as Pecca will only focus on manufacturing business.

M&A plan still on. Management updated that M&A exercise is progressing well and targets to make the necessary announcement soon. We expect Pecca to only conclude the M&A exercise in 2HFY21. 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 RM78.0m as at end 1QFY21) and debt.

Aviation. The certification for EASA (European Aviation Safety Agency) license remains on hold due to Malaysia’s closed boarders as EASA auditors are unable to fly into Malaysia and carry out the necessary auditing. Eventually, the license will allow Pecca to penetrate into the lucrative market of aviation leather seats.

Forecast. Unchanged.

Maintain BUY, TP: RM1.75. Maintain 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 sen/share (5.0% yield) in FY21.

Source: Hong Leong Investment Bank Research - 2 Dec 2020