Poor FY18 Performance, Below Expectations

Pecca’s FY18 core net profit declined by 29% to RM10m on lower revenue (-8% yoy), attributable to lower contribution from most segments (except for leather cut pieces supply) and margin contraction (-4.9%ppts yoy). The results were below market and our full-year estimates. Downgrade to HOLD rating (from BUY) with a lower price target of RM0.92 (from RM1.36).

FY18 Core Net Profit Declined 29% to RM10m; Below Expectations

Pecca reported a weak set of results. FY18 revenue dipped by 8% yoy to RM113m on lower contribution from its three core business segments. EBITDA margins (-4.9% ppts yoy) was squeezed by higher labour and maintenance costs. In tandem, FY18 core net profit fell 29% to RM10m, which was below expectations – accounting for 93% and 88% of full-year estimates. The variance against our forecast was due to lower-than-expected car seats sales volume and weaker-than-expected EBITDA margins of 12% (vs. forecast of 13%). Pecca declared 3 sen final dividend during the 4Q18, implying FY18 total dividend of 5 sen (vs. 5sen in FY17).

Sequentially, 4Q18 Core Net Profit Grew 31%

Pecca’s 4Q18 core net profit came in at RM2.6m (+31% qoq). Sequentially, the earnings improved as the previous quarter was hit by an unexpected spike in operating costs (ie. lower production efficiency, higher levy for foreign workers, higher overtime and maintenance costs).

Downgrade to HOLD With a Lower Target Price of RM0.92

We cut our FY19-20E EPS by 13-17%, as we impute lower sales volume. Post earnings adjustment, we cut our price target to RM0.92 (from RM1.36) based on 13x FY19E EPS (-2SD 3-year mean PE) (from PER of 16x). Although Pecca’s current FY19E ex-cash PER of 5x looks attractive, we believe prospects remain fragile due to the higher costs environment (ie. Minimum wage hike and production inefficiency). 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 - 24 Aug 2018