Following management’s briefing, we expect Pecca to leverage on the anticipated strong demand for CKD cars until June 2022 (driven by SST exemption) with margin improvement (following past-through of higher logistics and shipping cost). However the healthcare segment seems to face stiff competition. The new capacity expansion is expected to complete by end-2024. Despite the recovery expectation, we believe current share price has overshot the group’s earnings fundamentals. Maintain SELL recommendation with unchanged TP of RM1.90, based on PE 18x on CY22 profit.

1HFY22 earnings recap. 1HFY22 core PATMI of RM6.6m, was mainly boosted by a strong recovery in 2QFY22 with lockdown restrictions eased and the economy gradually reopened since mid-Aug. Nevertheless, 1HFY22 core PATMI still recorded a drop of -43.8% YoY, due to a combination of lower production of leather seats and upholstery and increasing operational costs (mainly due to logistics and shipping), partially offset by higher production from healthcare segment.

Leather car seats. Management guided production for leather seat cover has now achieved full rated capacity as the automotive industry accelerates production to meet the high backlogs and the continued strong new order demand. Nevertheless, Pecca suffered deteriorated margin in 2QFY22, due to the increasing logistics and shipping costs. Management clarified the higher costs can be passed through to OEM customers in coming quarters. Overall, we expect Pecca to see continued high production and improving margins in 2HFY22.

Healthcare. 2QFY22 saw lower revenue QoQ, mainly due to product and distribution restructuring during the quarter, as there was an increasing demand for upmarket respiratory mask segment but declining low end 3-ply mask segment (likely due to stiff market competition). Currently, the export market contribution is still very minimal. The current average utilization rate of the manufacturing capacity is c.50%. Management clarified the recent cancellation of proposed 51% acquisition in Rentas Health (an RPT) was due to management’s decision on better allocation of current cash holdings for future organic expansion plan.

Expansion. Recently, Pecca has acquired of 4.31 acres industrial land in Serendah and planned to construct a new leather-related production plant to complement its existing plant as current plant has already reached its rated capacity. The new plant is targeted to commence operation by 4QCY24, which will also cater for new product development. Guided capex was RM80m for building construction and RM 50m for machinery and equipment, financed by via debt-to-equity ratio of 70:30.

Forecast. Unchanged.

Maintain SELL, TP: RM1.90. We maintain our SELL recommendation on Pecca with unchanged TP: RM1.90 based on 18x PE on CY22 profits. While we are positive on Pecca’s near term leverage on the strong TIV rebound until June 2021 (driven by SST exemption), organic expansion plan and healthcare contribution, we believe current share price has overshot the group’s earnings fundamentals. Dividend yields remain unattractive at 3.0%.

Source: Hong Leong Investment Bank Research - 3 Mar 2022