Pecca reported a good set of results - 1QFY19 core net profit grew 26% yoy to RM3.5m (+37% qoq) on better-than-expected margins achieved from the richer margin product mix. We deem the results in line as we expect margins to taper in the coming quarters. We maintain our HOLD call with an unchanged TP of RM0.80.

1QFY18 Core Profit Jumps 26% Yoy

Pecca’s 1QFY18 core profit jumped 26% yoy to RM3.3m, driven by revenue growth of 2% yoy and a 2.8 ppts yoy increase in the EBITDA margin to 16.9%, its highest since 2QFY17 of 20.7%. Margins were better than expected mainly driven by a richer product mix – 1QFY19 saw higher contribution from PDI sales (+53% yoy, aided by stronger sales during the zero-rated GST period) and REM/export sales (+14% yoy, recovery of demand in Singapore markets) which commands better margins, and lower contribution from the low margin leather cut pieces sales (-54% yoy). Post tax holiday period, we believe the margins to taper, in anticipation of the (i) normalisation in product mix, and (ii) the impending minimum wage hike.

Sequentially, Earnings Is Higher by 37%

Although 1Q19 revenues fell by 7% qoq to RM27m, affected by the production halt from the Perodua Myvi, 1QFY19 results were sequentially higher by 37% qoq due to the above-mentioned factors.

Maintain HOLD With Unchanged TP of RM0.80

We leave our forecasts unchanged, as it is still premature to expect margins to return to normalcy – back to its FY13-17 EBITDA margin range of 18-23%, in view of the one-off tax holiday boost and higher cost environment. As such, we maintain our HOLD rating and TP of RM0.80 (based on an unchanged 13x FY19E PER). Key upside/downside risks include 1) higher/lower-than-expected car sales volume and 2) increase in raw material prices, 3) weakening Ringgit.

Source: Affin Hwang Research - 27 Nov 2018