We recently organised a conference call for investors with Pecca, where management highlighted that the business outlook is likely to remain soft in the medium term. The stock price has however corrected by 21% over the past 3 months and we believe the bad news is priced in. We upgrade Pecca to HOLD (from Sell) with a higher 12-month price target of RM0.80 (from RM0.60). Cash also accounts for 62% of Pecca’s market capitalisation. At 14x FY21E PER, Pecca trades close to stock’s 3-year forward PER (-1SD), which looks fair, reflecting Pecca’s softer earnings projection.

A Recap of 3QFY20 Earnings

To recap, Pecca’s 9MFY20 core net profit fell by 34% yoy to RM9m, largely due to weak 3QFY20 results of RM0.5m, its lowest quarterly performance since listing. Pecca’s 3QFY20 revenue dropped by 33% yoy to RM23m (- 26% qoq), dampened by i) production disruption from Perodua (est. 62% 3QFY20 car seat sales), ii) shorter working quarter due to Chinese New Year holiday and implementation of MCO since 18 Mar. Pecca’s 3QFY20 margin was also squeezed by 15ppts to 4.8%, due to i) salary increment, ii) bonus payment to employees, iii) complying with the minimum wage requirement and iv) lower plant efficiency during the MCO.

4QFY20 Likely a Loss-making Quarter; Future Outlook Looks Gloomy

We are anticipating a 55% yoy decline in FY20E core net profit, as we foresee a loss-making 4QFY20 quarter for Pecca, following the extension of MCO until 11 May 2020 and shorter working days in May. Management acknowledged that times are still tough, given the economic downturn while subdued consumer sentiment may hamper demand for cars moving into FY21E.

Aviation & M&A Plans Put on Hold

Pecca’s aviation segment (est.<1% of 9MFY20 revenue) will still have to take a backseat for the time being, in our view, as travel restrictions have jeopardised the audit process for the production organisation approvals from the European Aviation Safety Agency. Elsewhere, we learnt that merger & acquisition plans for Pecca have been temporarily put on hold, as a result of Covid-19 concerns.

Source: Affin Hwang Research - 5 Jun 2020