Pecca reported lower 6MFY18 core profit of RM5.4m (-43% yoy), as expected. The weaker earnings was primarily due to lower sales volume (6M18: -29% yoy), attributable to the transition in Perodua Myvi production where older model was being phased out while new models has yet to achieved full production speed. Moving in 2H18, we expect Pecca to benefit from a pickup in the deliveries of the Myvi 1.5L Advance variant, which will be equipped with Pecca’s leather seats. Maintain BUY with an unchanged target price of RM1.52. At CY18 excash PER of 8.5x/4.4% yield, valuations look attractive.

Results Were Deemed in Line, Expect Stronger 2HFY18

Pecca registered 6M18 core net profit of RM5.4m (-43% yoy), accounting for 29-30% of consensus and our full year forecasts. We deem the softer 1H18 earnings within expectations, expecting stronger results in 2H18, driven by higher demand for leather seats from the new Perodua Mvi (launched in Nov 2017) and new models from Toyota (CH-R, Camry, Vios). Pecca’s 6M18 revenue fell by 16% yoy to RM54.5m due to: (i) lower sales volume to Perodua, as the old Myvi model was being phased out during the quarter; and (ii) against a high base in 1HFY17 where Perodua put in higher orders in conjunction with the launch of Bezza in July16.

Sequentially, Core Earnings Were 5% Weaker

Notwithstanding a higher revenue (+4% qoq), Pecca’s 2QFY18 core net profit fell by 5% to RM2.6m due to lower EBIT margin (-0.8ppts qoq to 9.6%). The 2Q18 revenue growth was driven by higher sales of leather pieces (+26% qoq) which commands lesser margins, compared to sales of leather car seats (-2.5%qoq).

Reaffirm BUY Rating and TP of RM1.52

We affirm our BUY rating on Pecca and TP of RM1.52 based on an unchanged 2018E PER of 16x. Pecca remains our preferred pick within the auto sector. Pecca’s current CY18 ex-cash PER of 8.5x looks attractive and its strong net cash position of RM96.7m provides ample room for a higher dividend payout and earnings-accretive M&A. Downside risks include 1) lower-than-expected car sales volume and 2) increase in raw material prices.

Source: Affin Hwang Research - 28 Feb 2018