Pecca hosted a briefing on the announcement of its venture into the production of Personal Protective Equipment (PPE), which was well attended by >30 participants. While sequential results are expected to be in the red due to the extended Movement Control Order (MCO), the cheaper car prices from the Penjana tax incentive and the maiden contribution from the PPE venture should lift Pecca’s earnings in FY21E, we believe. We lift our earnings slightly by 1% for FY21-22E, and raise our TP to RM1.31 (from RM1.30). Maintain BUY.

Announcement on Foray Into PPE Business

Pecca has ventured into the PPE-related business activity, which includes production of face masks, face shields and PPE garments. The Group has allocated about RM2.2m in capex for the production of face masks, where 70% will be used for the purchase of machineries and the balance is allocated for setting up cleanroom facilities. The Group has no confirmed orders yet, but believes the ongoing discussion with numerous healthcare supplier distributors, which are targeting clientele in the commercial and healthcare industry, should bear fruits.

Production of PPE Is Expected to be Up and Running by 1QFY21

Management believes production of PPE can hit the ground running by 1QFY21, once they have attained all the approvals and certification from the relevant authorities. Pecca plans to repurpose two of its existing production lines and leverage on its existing talent (est.12% of workforce) for the manufacture of PPE garments; this should help to optimise the underutilised capacity in the near-term. The equipment for the production of face masks are expected to be commissioned by end July, with an annual production capacity of 18m units for the 3-ply face mask and 11m units for the N95 mask respectively (based on one shift).

Near-term Results Will Likely be Sequentially Weaker

Management shared that its operations were severely disrupted during the extension of the MCO until Early-May 2020 and shorter working days in May. In addition, we gather that Pecca’s current utilisation is still below its preMCO utilisation levels of 85%. These factors have reaffirmed our view that the 4QFY20 results will likely end in the red

Source: Affin Hwang Research - 1 Jul 2020