This article first appeared in The Edge Financial Daily on September 26, 2019

Pecca Group Bhd
(Sept 25, RM1.10)
Upgrade to hold with an unchanged target price of RM1.10: Although Pecca Group Bhd’s share price has corrected by 13% since it announced disappointing fourth quarter ended June 30, 2019 (4QFY19) results, its revenue base looks modest, and a dip in margins and earnings per share (EPS) will likely limit any bullish sentiment towards Pecca in the near term.

Pecca’s largest revenue contributor, the original equipment manufacturer (OEM) segment, should remain healthy, underpinned by strong demand from Perodua (55% of Pecca’s FY19 revenue).

To reduce its reliance on local OEM customers, Pecca is keen to grow the replacement equipment manufacturer (REM) segment by expanding its export geographical reach. It could be a year of two halves for the pre-delivery inspection segment — Nissan’s softer car sales in the near term could soften its contribution in the first half ending Dec 31, 2019 (1HFY20), followed by better times in 2HFY20 on possible launches of new Nissan models. However, contributions from leather cut pieces may wane in the coming months.

Pecca’s quarterly earnings before interest, taxes, depreciation and amortisation margin has shown signs of exhaustion since the 2QFY19 peak. We think this trend will likely persist into FY20 to FY22, considering the low-margin sales mix (a lower average selling price and higher contribution from the OEM segment), a higher cost environment (higher wages) and sustained weakness in the ringgit versus the US dollar.

We think the cheaper leather hide prices, reduced contribution from lower-margin leather cut supply, higher REM sales and better production efficiency may not be sufficient to mitigate the margin squeeze. — Affin Hwang Capital, Sept 25