Pecca’s FY18 earnings were off to a weak start, with 1QFY18 net profit of RM2.8m (-33% yoy) accounting for only 18% of our and 15% of the street’s full-year forecasts. We deemed this to be in line with our expectation as we expect the upcoming new Perodua Myvi launch to drive earnings momentum at a faster pace in the coming quarters. No dividend was declared for the quarter. As we believe that valuations have largely priced in the likely earnings improvement, we maintain our Hold rating with a lower target price of RM1.35 (from RM1.52) based on a lower target of 16x on our calendarised 2018E EPS.

1QFY18 Core Profit Weaker Yoy

Pecca’s 1QFY18 core profit fell 33.3% yoy in line with lower contribution from its three major segments: OEM (-27.7% yoy), REM (-10.2% yoy) and PDI segment (-26.4% yoy). OEM sales were down due to the end-of-life of a car model for a major customer; the replacement model is expected to be launched in 2QFY18. In addition, REM sales were affected in 1QFY18 because of a temporary supply interruption caused by the new vehicle emission scheme in Singapore. The EBITDA margin fell by 4.6ppts yoy in line with the overall decline in revenue.

Earnings Up Qoq Despite a Lower Revenue on Deferred Tax

1QFY18 revenue dropped by 16.1% qoq, affected by lower OEM sales (-13.4% qoq), which is in line with the drop in sales from its key customers. The other segments also suffered qoq drops - 24.8% for REM and 14.5% for PDI. Despite the decline in revenue, core net profit was up 3.3% qoq due to a high effective tax in 4QFY17, as a result of a deferred tax adjustment.

Maintain HOLD

We make no changes to our earnings forecasts at this juncture as we expect the launch of the new Perodua Myvi to drive higher sales volumes in the coming quarters. We maintain our HOLD rating with a lower 12- month TP of RM1.35, based on a lower 16x PER multiple (from 18x). Key upside risks to our call: a quicker-than-expected auto sales recovery and lower raw-material prices. Downside risks: lower-than-expected car sales volumes and a spike in raw-material prices.

Source: Affin Hwang Research - 28 Nov 2017