Pecca reported 3QFY21 PATMI at RM5.9m (-11.2% QoQ; +27.4x YoY) and 9MFY21 at RM17.8m (+96.3% YoY), within HLIB expectation (66.4%) but above consensus (76.0%). For FY21, we expect Pecca to continue leveraging on the strong automotive demand during SST exemption period and also robust demand for its new venture PPE mask. Following the run up in share price (+257.3% since starting 2021), we downgrade our recommendation to SELL (from Hold) with unchanged TP of RM2.12 based on unchanged 15x P/E on CY21 profit.

Within expectation. Reported a core PATMI of RM5.9m for 3QFY21 (-11.2% QoQ, 27.4x YoY) and RM17.8m for 9MFY21 (96.3% YoY). We deem the result within HLIB expectation (66.4%) as we expect stronger performance in 4QFY21 as OEM accelerates productions to meet the outstanding bookings, but above consensus (76.0%). Net EIs in 9MFY21 at RM1.45m, driven mainly by reversal of impairments for inventories and receivables amounting to RM2.4m (mostly in 3QFY21), which was partially offset Covid-19 related expenses of -RM0.8m (mostly in 2QFY21).

Dividend. None.

QoQ. Despite the higher revenue, core earnings dropped -11.2%, attributed to deteriorated product sales mix.

YoY & YTD. Core earnings improved 27.4x YoY and 96.3% YTD, mainly due combinations of: (i) higher leather sales volume; (ii) new contribution from healthcare segment since 2QFY21; and (iii) low base effect during the implementation of MCO1.0 in 3QFY20, resulting sudden stop in production and order delivery,

Outlook. We expect sustained earnings into 4QFY21 as OEMs rush to meet order delivery prior to the end of SST exemptions by 30 Jun 2021 while demand remains strong for its new PPE segment.

Forecast. Unchanged.

Downgrade to SELL, TP: RM2.12. Following the outperformance of share price (+257.3% since starting 2021), we further downgrade our recommendation to SELL (from Hold) on Pecca with unchanged TP of RM2.12 based on unchanged PE of 15x of CY21 profits. We believe the current share price has overshot the fundamentals of Pecca’s earnings growth for the current financial year while outlook for upcoming financial year remains uncertain due to the pandemic. Although Pecca boasts a strong net cash position of RM68.5m (translating into 37.3 sen/share), dividend yield has become less attractive (FY21-22: 1.9%) following the share price run up.

Source: Hong Leong Investment Bank Research - 24 May 2021