Pecca delivered a strong set of results – 1HFY19 core net profit of RM9.2m (+68.5% yoy) beat market and our expectations, driven by higher revenue and margin expansion. We raised our FY19-21E EPS by 18-50% and increased our 12-month price target to RM1.14 (from RM0.80). Upgrade to BUY (from Hold) as Pecca continues to ride on the continued demand for Perodua model line-ups.

Sequentially Higher on Stronger OEM Sales and Margin Expansion

Pecca’s 2QFY19 core net profit surged to a record high of RM5.7m (+61.4% qoq), driven by higher revenue (+24% qoq) and margin expansion. The revenue increase was mainly due to higher OEM sales (+68.7% qoq; pent up demand from Perodua on recovery from the Myvi supply disruption in September 2018). The richer margin product mix (ie. OEM & export segment) also aided a 6.6ppt increase to EBITDA margins of 23.5%, which we think is not sustainable, due to the higher cost environment. Historically, Pecca’s 2nd quarter is seasonally the highest.

1HFY19 Core Net Profit Up 68.5% Yoy – Above Expectations

Cumulative, 1HFY19 core net profit of RM9.2m (+68.5% yoy) blew past our and consensus, achieving 79% and 72% of the respective full-year estimates. The sharp yoy profit growth was partly attributable to a low base effect where the car seat sales volume during 1HFY18 was sluggish, especially from Perodua (mismatch of production planning) and Nissan (lower sales volume). However, management did not declare any dividend for 1HFY19 (1HFY18: 2 sen).

Upgrade to BUY With Higher TP of RM1.14

We have raised our FY19E EPS forecasts by 46.0%, incorporating the stronger-than-expected 1HFY19 earnings and increased FY20-21E EPS by 18-25% on (ii) higher revenue growth and (ii) higher EBITDA margin assumptions circa 18% (previous forecast: 16-17%), as we expect gradual improvement in manufacturing yields (previously experienced sudden departure of workers, coupled by inexperienced new workers) and better labour cost control. In tandem with our earnings upgrade, we raised our 12-month price target to RM1.14 (from RM0.80) based on 13x CY19E PER – its current valuation of 10.5x FY19 PER/5.3% yield looks attractive.

Source: Affin Hwang Research - 1 Mar 2019