Maintain “Not Rated” with a revised TP of RM1.43 (from RM1.52) based an unchanged 12.0x PER on revised FY17E EPS of 11.9 sen. We trim our expectations as 9M16 PATAMI accounted for only 55.8% of our estimates, following the weaker set of 3Q16 quarterly results, dragged by the slowing OEM segment. Still, we believe PECCA’s growth prospect is intact as production orders carried by new model launches from clients anticipated to be released in 2HCY16.

9M16 PATAMI of RM11.7m accounted for only 55.8% of our FY16 estimates, primarily due to lacklustre sales in the OEM segment which is also the main revenue contributor of PECCA. We believe this was owing to slower demand of automotive vehicles, underpinned by recent tides of poor consumer sentiment as well as large pre-emptive purchases by consumers in anticipation of the hike in automobile prices in Jan 2016. This trend can be seen in the likes of Toyota - PECCA’s largest client, which based on MAA statistic, saw 1QCY16 TIV of 7,044 units as opposed to TIV of 22,637 units (-68.9% QoQ) in 4QCY15.

Quarterly sales on a decline. PECCA recorded the second consecutive declines in quarterly sales by 14.5% QoQ to RM27.0m in 3Q16. The weaker top-line was dragged by the OEM segment which toppled by 32.5% QoQ to RM11.5m. The PDI segment also weakened by 17.3% QoQ while the REM segment generated rather flattish results. 3Q16 PATAMI dipped by 33.3% QoQ to RM3.1m as higher administrative expenses were incurred arising from higher staff cost, likely due to yearend staff incentives (i.e. bonus).

A 2.0 sen dividend pay-out constituted 45.5% of our full-year dividend expectation. We deem this to be within expectation as we are anticipating a full-year dividend pay-out ratio c.40-50%.

Toning down our FY16/FY17 forecasts. In lieu of the weaker-thanexpected performance thus far, we have revised our FY16/FY17 PATAMI by -17.2%/-6.3%. The adjustments are mainly to account for the lowerthan- anticipated sales in the OEM segment. However, 4Q16 should experience an improved performance, as 3Q16’s sales were also affected by certain project setbacks, which delayed the production of leather car seat covers. In addition, we understand that PECCA is also partaking in delivering OEM seat covers to certain clients that are launching new car models by 2HCY16.

Maintain Not Rated with a fair value of RM1.43 (from RM1.52, previously). We ascribe 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 revised FY17E EPS of 11.9 sen. While we continue to maintain that other major growth catalysts (i.e. aviation market penetration) may only kick-in by FY18E, 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. Recall that a portion of PECCA’s IPO proceeds is intended to fund the opening of 50 retail outlets.

Key risks: (i) product substitution for car manufacturing clients, (ii) stronger-than-expected competition, (iii) unfavourable fluctuation in raw material prices, and (iv) delay in rollout of retail outlets and expansion plans.

Source: Kenanga Research - 16 Jun 2016