We recently met with Pecca’s management to get an update on their business strategy moving forward. Management remains upbeat on its 2020 outlook, although we expect earnings growth to slow to 3% from 66% in the fiscal year before. In view of higher projected car seat sales, we raise our EPS forecasts by 4-6% for FY20-22E, and raise our target price to RM1.23 (from RM1.20). At 12x FY20E PER, valuation looks fair. Maintain HOLD.

Robust OEM Contribution on Higher Perodua Demand Sales

We believe Pecca’s largest revenue contributor, the Original Equipment Manufacturer’s (OEM; 82% of 1QFY20 revenue) upward momentum remains sturdy – 1QFY20 revenue grew by 94% yoy to RM23.5m, underpinned by strong demand for Perodua leather-wrapped model variants (64% of Pecca’s 1QFY20 car seat sales volume). Management is guiding higher 1HFY20 OEM volumes from the recently facelifted Axia (launched Sept-19) and facelifted Bezza (launched Jan-20; Perodua targets to sell an average of 4k units/month). Upcoming expected model launches from Perodua, including the all-new D55L SUV and replacement Alza could potentially benefit Pecca moving into 2HFY20, we believe.

A Season of Two Halves for PDI Segment

The Pre-Delivery Inspection’s (PDI) 1QFY20 revenue (7.6% of 1QFY20 revenue) experienced a 45% yoy decline to RM2.7m (-4% qoq), dampened by a 25% yoy decline in Nissan car sales volume. We think it could be a year of two halves for the segment – weaker Nissan car sales in the near term could soften contributions in 1HFY20, while the possible new Nissan launches (ie, Almera, Kicks, Sylphy) should reinvigorate PDI’s 2HFY20 prospects. Besides Nissan, we learnt that orders from Proton’s 2019 models, ie, Iriz, Saga and Persona, have slowly picked up since 4QCY19 (2QFY20). Elsewhere, its efforts to participate in Proton’s leather localisation programme (for the upcoming X50) have yet to bear fruit, though we believe Pecca stands a chance of winning the contract due to its reputable long track record and good working relationship with Proton. We have not factored in any Proton CKD contract wins in our forecasts as details of the contract remain scarce at this time.

Source: Affin Hwang Research - 20 Jan 2020