Pecca delivered a decent set of results – 6MFY19 core net profit grew by 3% yoy to RM9.5m on higher revenue (+9% yoy), partly offset by a weaker EBITDA margin (-2.5ppts). Overall, the results were within street and our expectations. We think the pessimistic sentiment and the slowing economy may potentially hurt car-seat sales in the coming quarters. As such, we cut our FY20-22E core net profit by 6- 7% and lower our 12-month TP to RM1.15 (from RM1.23). Maintain HOLD.

6MFY20 Earnings Grew by 3% Yoy

Pecca’s 6MFY20 core net profit rose by 3% yoy to RM9.5m on higher revenue (+9% yoy), partly offset by a weaker EBITDA margin of 18.4% (-2.5ppts, due to a higher contribution of the lower-margin OEM segment). On a segmental basis, the OEM segment (+33% yoy, as Perodua’s sales volume rose by 7.7%) and leather cut pieces (+56% yoy on higher demand from Subaru China) have continued to perform well whereas the REM (-38% yoy) and PDI segments’ (-32% yoy) performance was disappointing, as expected. Overall, the core net profit was within street and our expectations.

Sequentially, 2QFY20 Core Net Profit Was Flat

Although 2QFY20 revenue declined by 10% qoq to RM31m, its core net profit was flat at RM4.8m (+2.4% qoq) on higher EBITDA margins (+2.5ppt to 19.7%, aided by the higher-margin PDI segment). Elsewhere, management did not declare any dividends for 6MFY20.

Maintain HOLD With Lower TP of RM1.15

We cut our FY20-22E EPS forecasts by 6-7% to factor in lower car-seat sales volume. In tandem with our earnings cut, we lower our TP to RM1.15, based on unchanged 13x CY20E PER. At 12x FY20E PER, valuation looks fair. Rerating catalyst include: (i) successful expansion of the commercial aviation business and (ii) securing the 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 - 24 Feb 2020