We recently visited Pecca’s manufacturing plant in Kepong, Kuala Lumpur. Although we expect Pecca’s earnings to recover from the operational challenges and margin squeeze during FY18, the sales outlook does not appear exciting moving into FY19E. Therefore, we maintain a HOLD rating with a lower TP of RM0.80 (from RM0.92) based on an unchanged 13x FY19E PER. At a PER of 12x FY19E, its valuation looks fair vs. those of the small-mid cap auto players under our coverage at an average CY19E PER of 12.1x.

Pecca’s Plant – Worker Issue Resolved; Myvi Production Resumed

We recently visited Pecca’s plant and are pleased that manufacturing yields on Perodua Myvi leather seats have improved in recent months after the teething issues and shortage of foreign workers were resolved

Tepid Revenue Growth in FY19E

FY19 could be a year of two halves – production hiccups at Perodua may hit Pecca’s 1HFY19 revenue and profitability. Moving into 2HFY19, we expect the several new launches by Perodua and Toyota to drive vehicle sales and lift demand for Pecca’s products. Elsewhere, the popular demand for the allnew Nissan Serena should support demand for the PDI (Pre-delivery Inspection) segment while the shrinking leather replacement market should hit the REM (Replacement Equipment Manufacturers) segment.

Overall, FY19E EBITDA Margin Is Likely to Rebound From the Low

We expect Pecca to achieve a higher FY19E EBITDA margin of 14.8%, for a commendable recovery from its 5-year low of 13.8%, driven by a gradual recovery in manufacturing yield. Nonetheless, the margin would still come in below the 18-25% range seen in FY14-17 due to weaker Perodua sales in 1HFY19 and a low-margin product mix.

Maintain HOLD, TP Lowered to RM0.80

We cut our FY19-21 EPS forecasts by 9-13%, incorporating lower revenue growth that would be partly offset by a recovery in the profit margin, and lowered our TP to RM0.80 based on an unchanged 13x FY19E PER. At a 12x FY19E PER, the share price looks fair vs. its small-cap auto peers.

Source: Affin Hwang Research - 8 Nov 2018