This article first appeared in The Edge Financial Daily on March 6, 2019
Pecca Group Bhd
(March 5, RM1.09)
Reaffirm buy with an unchanged target price (TP) of RM1.14: We expect contributions from Pecca Group Bhd’s original equipment manufacturing (OEM) segment to gain momentum in second half of financial year 2019 (2HFY19), driven by the newly launched Perodua Aruz and continued demand for other key models of Perodua (Perodua contributes to 56% of Pecca’s 2QFY19 seat volume). The strong demand for Perodua’s leather seat covers, in our view, should more than offset the flattish contributions from the pre-delivery inspection (PDI) and replacement equipment manufacturing (REM) segments for 2HFY19. Despite the discontinuation of leather cut piece supply for Toyota’s old Vios, Camry and Hilux in 1HFY19, Pecca has successfully bagged the contract for 2019 Vios, which we expect to be a high-volume product, and could surprise in 2HFY19. No indication has been given on the potential supply for Proton’s X70.
Pecca’s earnings before interest, taxes, depreciation and amortisation (Ebitda) margin for second quarter of FY19 jumped by 6.6 percentage points to 23.5% on: i) higher average selling price (price revisions from key OEM); ii) lower cost of raw materials procured (through a different hide supplier); and iii) better production yield (2HFY18 affected by Perodua Myvi supply disruption and inefficient new batch of workers). Yet, we think Pecca’s Ebitda margin will likely normalise in 2HFY19, in view of the higher cost environment (higher wages) and lower margin sales mix (OEM segment commands lower margin compared to PDI/REM segments). — Affin Hwang Capital, March 5