• Pecca posted a core net loss of RM0.7m in 4Q FY20 (vs. core net profit of RM0.3m in 3Q FY20), due to the negative impact of the MCO.
• Results were however above expectations – FY20 core net profit of RM9m accounted for 118% of street and 106% of our full-year earnings forecasts.
• At 17x FY21E PER, we believe valuations have largely priced in the positives. We downgrade Pecca to a Hold based on valuation.

FY20 Core Net Profit Fell by 45% Yoy, But Was Above Expectations

Pecca’s 4QFY20 revenue declined by 35% yoy to RM15m, owing to the temporary halt of business operations during the Movement Control Order (MCO). The significant lower sales were not able to offset the fixed overhead, leading to an unprecedented core net loss of RM0.7m. (vs. 4Q FY19 core net profit:of RM2.9m) On a cumulative basis, FY20 revenue and core net profit stumbled by 20% yoy and 45% yoy to RM105m and RM9m, respectively. The earnings were above street and our expectations – FY20 core net profit accounted for 118% of street and 106% of our full-year earnings forecasts. Key variance was due to higher-than-expected margins.

Sequentially Weaker; Better 1H FY21 Prospects on SST Exemption Period

Sequentially, revenue plunged by 35% qoq to RM15m, while earnings nosedived into the red owing to the aforementioned factors. Going forward, we foresee 1H FY21 prospects to fare better HoH, riding on the rebound in car sales, following the cheaper car prices from the sales and service tax incentive. Elsewhere, Pecca declared a 1.6 sen interim dividend during the 4Q FY20, implying a FY20 total dividend of 4.6 sen (vs. 6sen in FY19).

Downgrade to Hold on Valuations

We make no major changes to our earnings forecasts, as it is still premature to expect margins to return to normalcy – returning to its FY19 EBITDA margin range of 18%, in view of the escalation in operating costs amid the MCO. Following the 27% run-up in the share price in the past month, we are downgrading Pecca to Hold (from Buy) with a lower 12-month TP of RM1.11 (previously RM1.31) now based on a CY21E PER of 16x (past-5-year auto sector mean PER; from 19x). At 16x FY21E, its valuation looks fair, as we think that the share price has largely priced in the positives. Rerating catalysts include: (i) successful expansion of the commercial aviation business and (ii) securing contract for Proton’s CKD leather programme. Upside/downside risks include 1) higher- /lower-than-expected car sales volume, and 2) higher-/lower-than-expected leather hide prices.

Source: Affin Hwang Research - 1 Sept 2020