We upgrade Pecca to a BUY and raise our price target to RM1.52 as strong demand for the refreshed Perodua Myvi and new model line-ups from Toyota will likely spur demand for leather seats. As Pecca is the largest automotive leather upholstery player in Malaysia, we project its revenue to grow at a CAGR of 6.4% for FY17-20E as more mainstream cars are featuring leather content in entry-level segment cars. Potential re-rating catalysts include penetration into leather upholstery for commercial aviation and the Thailand export market.

Perodua Myvi Spurs Excitement

As the main leather car seat supplier to Perodua, strong demand of the new Perodua Myvi augurs well for Pecca. We estimate that Pecca will see car seat orders increase by an additional 21% from the continued demand for Perodua’s top-selling model, MyVi, and its other models. While Perodua is aiming to sell 209k units in 2018 (+2% yoy), an improved product mix and thus higher demand for leather seats will likely drive the additional growth we are expecting.

Higher Payout to Shareholders

With a net cash position of RM97.5m in 1Q18 (40% of current market cap), Pecca is likely to reward shareholders with a higher pay-out in lieu of an ambitious expansion. We believe the Group will continue to adopt a cautious stance in its expansion strategy, in view of the weak sentiment surrounding the automotive market. We believe Pecca would potentially increase its dividend payout to 6 sen (based on a payout ratio of 63%) in FY18E in tandem with its stronger earnings and limited near-term capex requirements.

Upgrade to BUY and TP of RM1.52

We raise our 2018-19 EPS forecasts by 12-13% on revised car seat sales assumptions. We upgrade Pecca to BUY from HOLD, with a revised 12- mth price target of RM1.52 based on an unchanged 2018E PER of 16x. Pecca’s current CY18 ex-cash PER of 8.1x looks attractive and its strong net cash position of RM97.5m provides ample room for a higher dividend payout and earnings-accretive M&A.

Source: Affin Hwang Research - 20 Feb 2018