Pecca’s FY19 core net profit of RM16.4m missed estimates due to the weaker-than-expected 4QFY19 performance. Although it was below expectations, Pecca’s FY19 core net profit was higher by 62% yoy due to a low-base effect. In light of the eroding margins, we cut our FY20-21E EPS forecast by 9-10% and lower our target price to RM1.10 (from RM1.20). At 15x FY20E PER, valuation looks demanding, considering a likely EPS contraction in FY20-22E. Downgrade to SELL (from BUY).

4QFY19 Core Earnings Fell 35% Qoq on Weaker EBITDA Margin

Although revenue rose by 4% qoq, Pecca’s 4QFY19 core net profit fell 35% qoq to RM2.9m as EBITDA margin eroded by 6ppts to 12%. The weaker EBITDA margin was due to (i) low-margin sales mix (lower expand acronym for Replacement Equipment Manufacturer (REM) and PreDelivery Inspection (PDI) contribution) and (ii) higher administration cost. To motivate and reward the employees, Pecca has decided to implement an employee performance program worth >RM2m on an annual basis.

FY19 Results Missed Expectations

Pecca’s FY19 core net profit of RM16.4m (+62% yoy) was decent but was below expectations, accounting for 89% and 91% of street and our esimtates respectively. The disappointment stemmed from the weakerthan-expected 4QFY19 performance mentioned above. We believe EBITDA margins may erode further, considering the higher cost environment as well as low-margin sales mix (OEM segment demands lower margins vs PDI/REM segments). That aside, Pecca’s key segments have performed well in FY19 (Fig 2) and we believe the stronger demand for local car marques (7M19 market share of 55.8%) will grow the Group’s OEM segment. No dividend was declared during the quarter.

Downgrade to SELL With Lower TP of RM1.10

We cut our FY20-21E EPS by 9%-10% after incorporating lower EBITDA margin assumptions of 17%-18%, below the 5-year average EBITDA margin levels of 19%. Our 12-month TP is lowered to RM1.10 after the earnings revision on an unchanged target PER of 13x. We downgrade the stock to SELL (from BUY). At 15x FY20E PER, valuations look demanding.

Catalyst and Key Risks

Rerating catalyst include successful (i) expansion of commercial aviation business and (ii) securing contract for Proton’s CKD leather programme. Upside risks include 1) higher-than-expected car sales volume and 2) lower-than-expected raw material prices.

Source: Affin Hwang Research - 26 Aug 2019