We walked away positively from Pecca’s 2QFY19 results briefing, conducted by Mr. Foo Ken Nee (new CFO) which was attended by some 20 analysts and fund managers. The sustained contribution from Perodua’s existing and fresh model line-ups (particularly Myvi, all-new Aruz and possibly an Alza facelift) in 2019 would underpin earnings growth over FY19-20E. At 12x CY19E PER/ yield of 5%, Pecca’s valuations looks attractive to us. We reaffirm our BUY call on Pecca with an unchanged TP of RM1.14.

Topline Growth Led by OEM Segment

We expect contribution from the OEM segment to gain momentum in 2HFY19, driven by the newly launched Perodua Aruz and continued demand for other key models of Perodua (Perodua contributed 56% of Pecca’s 2QFY19 seat volume). The strong demand for Perodua’s leather seat covers, in our view, should more than offset the flattish contribution from the PDI and REM segments in 2HFY19. Despite the discontinuation of leather cut pieces supply for Toyota’s old-Vios, Camry and Hilux in 1HFY19, Pecca has successfully bagged the contract for 2019 Vios, which we expect to be a high volume product, and could surprise in 2HFY19. No indications were given on the potential supply for Proton’s X70.

Margins Likely to Normalise in 2HFY19, From the 2QFY19 High

Pecca’s 2Q19 EBITDA margins jumped by 6.6ppt to 23.5% on (i) higher ASP (price revisions from key OEM), (ii) lower cost of raw materials procured (through a different hide supplier) and (iii) better production yields (2HFY18 affected by Perodua Myvi supply disruption and inefficient new batch of workers). Yet, we think Pecca’s EBITDA margins will likely normalise in 2HFY19, in view of the higher cost environment (ie. higher wages) and lower margin sales mix (OEM segment commands lower margins vs PDI/REM segments).

Maintain BUY With Unchanged TP of RM1.14

We make no changes to our estimates, as there were no major surprises. We reiterate our BUY call on Pecca with an unchanged TP of RM1.14, based on 13x CY19E PER. Pecca’s current CY19E PER of 12x and 5% yields look attractive. Downside risks include 1) lower car seats volume, 2) increase in leather hide prices and 3) volatility in USD/MYR.

Source: Affin Hwang Research - 5 Mar 2019