A Lackluster Quarter

Pecca reported a weak set of results – 9MFY18 core net profit fell 30.3% to RM8.2m, tracking a 7.6% decline in revenue. The results were below market and our expectations due to weaker-than-expected margins. We cut our FY18-20E EPS by 2-25% and lowered our price target to RM1.36. Maintain BUY. Despite the cut, Pecca’s valuation at CY19 excash PER of 4x remains attractive. Pecca’s long-term prospects remain bright, in view of the 1) stronger demand from Perodua key models, 2) TIV recovery, 3) strengthening Ringgit, and 4) potential upside to yields of 6.8% given the net cash position.

Earnings Down 30.3% Yoy in 9M18, Below Expectations

Pecca’s 9M18 core net profit decreased 30.3% yoy to RM8.2m mainly due to lower revenue for three core business segments and weaker EBITDA margins. The OEM segment was down 13.8% mainly due to lower car seats volume from Perodua and Nissan; PDI segment, which commands higher margins, also suffered a 32.2% drop in revenue. EBITDA margins was also lower by 4.8ppt due to higher operating cost from higher levy cost for foreign workers, higher overtime and higher maintenance cost. All in, the 9M18 results were below expectations – delivering only 52% and 57% of both consensus and our forecasts respectively. No dividends declared during the quarter.

Sequentially, Core Earnings Were 19.1% Weaker

Notwithstanding a higher revenue (+4.1% qoq), Pecca’s 3QFY18 core net profit fell by 19.1% qoq due to lower EBITDA margin (-2.3ppt to 10.2%), affected by higher operating cost as mentioned above. The high costoperating environment will likely persist over FY19-20E, we opine.

Cutting FY18-20E EPS by 2%-25%, Maintain BUY With Lower TP of RM1.36

We cut our FY18-20E forecast by 2-25%, factoring lower EBITDA margins of 13.1-14.6% (previously 17.5%-17.9%). Pecca’s current CY18 ex-cash PER of 4x looks attractive and its strong net cash position of RM96.5m 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, 3) weakening Ringgit.

Source: Affin Hwang Research - 25 May 2018