The leading player in automotive leather upholstery, PECCA is involved in the styling, manufacturing, distribution and installation of leather upholstery of passenger car seats covers for original equipment manufacturing (OEM), pre-delivery inspection (PDI) and replacement equipment manufacturing (REM) market segments, as well as the supply of leather cut pieces for OEM market segment. (Please refer to the overleaf for more details of PECCA’s business segments.)

PECCA caters to c.68% of the domestic market for the installation of leather upholstery for passenger car seat covers for several large automotive brands such as Proton, Perodua, Toyota, Honda and Nissan. This comprises of around 90% of the Group’s revenue which is largely derived from its domestic OEM segment. The remaining c.10% revenue is primarily export-driven and focused on the REM segment to clients in USA, Netherlands and Australia as well as PDI exports to Thailand and Japan. While management guided that PECCA does not enter into any supply contracts with its clients to supply leather upholstery goods, they are confident of PECCA’s position as they have been consistently meeting the clients’ specified quantities and quality. (Please refer to the overleaf for more details of the leather market.)

Sales were boosted by expansion in contracts from its more prominent OEM clients in FY14/FY15 and recorded RM99.6m (+50.6% YoY)/RM129.5m (+30.1% YoY) topline, respectively. Its net profit (NP), however, expanded in a slightly slower pace in FY14 with RM14.5m (+37.4% YoY) followed by another +23.9% YoY (to RM17.9m) a year later, no thanks to the fluctuations in leather prices. Despite slower net profit growth, its margin managed to sustain at 13%-15% range, in-line with its historical trend.

IPO proceeds to utilise for capacity expansion and penetration into new market segments. Management seeks to enlarge production capacity through by expanding its existing production facilities as well as equipping new machineries. Management is hopeful this would yield an increase in production capacity by c.42%. The utilisation rate of its existing production facilities stands at c.87%. With the additional funding from PECCA’s IPO proceeds, management has expressed the Group’s direction to venture into additional market segments, being (i) retail market; (ii) aviation market; and (iii) Thailand market, although efforts of entering into these market segments may not fully bear fruit till mid-FYE18. (Please refer to the overleaf for more details of PECCA’s new market segments and the utilisation of IPO proceeds.)

FY16/FY17 forecasts. While major growth catalysts (i.e. aviation market penetration) may only kick-in by FY18E, we project the group to record a steady revenue growth of 9.9%/12.0% for FY16E/FY17E, mainly driven by its new retail segment as well as capacity expansion. Its FY16E/FY17E net profit, meanwhile, is expected to grow by 14.7%/15.0%, respectively, on the back of slight margins expansion. A dividend payout policy of 40% was recommended by the management, which could fetch 4.4 sen/5.1 sen dividend or 3.1%/3.6% dividend yield for FY16E/FY17E, which we think is possible with support from its healthy FCF.

Not Rated with a fair value of RM1.52, by ascribing a PER of 12.0x (representing the higher range of its PER-band, which is also in-line with its closest industry peer) on our FY17E EPS of 12.7 sen. We believe the valuation is fair given its 2-year NP CAGR of c.15% which implies a PEG of c.0.8x, backed by its market position and prominent clientele range. However, we do not discount the possibility of further earnings re-ratings in the event PECCA’s penetration efforts into the new market segments materialise sooner than expected. 

Source: Kenanga Research - 19 Apr 2016