This article first appeared in The Edge Financial Daily on December 3, 2019

Pecca Group Bhd
(Dec 2, RM1.20)
Maintain buy with an unchanged fair value (FV) of RM1.46: Our “buy” recommendation on Pecca Group Bhd is maintained with an unchanged FV of RM1.46 per share based on a financial year 2021 forecast price-earnings ratio of 15 times, in line with its historical average. Pecca’s first quarter ended Sept 30, 2019 of financial year 2020 (1QFY20) core net profit of RM4.4 million was within expectations, at 26% and 27% of our and consensus’ full-year estimates respectively.

Pecca’s 1QFY20 turnover grew 29% year-on-year (y-o-y) underpinned by top-line growth at its automotive division up 29%, thanks to an improved original equipment manufacturing (OEM) contribution, partially mitigated by a weaker performance from the replacement equipment manufacturer (REM) down 40% due to a decrease in revenue orders from Asia, and the pre-delivery inspection down 45% due to a high-base effect as there was an additional project in 1QFY18. Pecca’s aviation business remained insignificant, recording a turnover of only RM200,000 — less than 1% of the group’s total top line.

Geographically y-o-y, Pecca’s operations in Malaysia improved by 32%, Singapore (+42%) and Oceania (+14%), partially offset by a weaker showing from Europe down 26% and North America (-57%). We believe this is a telltale sign of a still-buoyant domestic automotive market as it is supported by its largest market shareholder Perusahaan Otomobil Kedua Sdn Bhd (Perodua). Overall, Pecca’s exports grew 11%. For 1QFY19, the split between the domestic and export markets was 82:18.

Its 1QFY20 core earnings grew a larger 34% y-o-y thanks to a 0.4 percentage point improvement in net margin to 12.5%, which we believe was driven largely by a better sales mix for the quarter as the Perodua Aruz production was ramped up. Pecca’s balance sheet strength continued to improve with its net cash rising to RM98.2 million or 54 sen per share, from RM92.8 million or 51 sen per share three months ago.

We like Pecca because as a sole supplier of leather car seats, it is a key beneficiary of Perodua’s dominance in the local automotive sector; its expansion plans for China being put in place; and the group’s potential entry into the lucrative aircraft seat segment, if it is finally able to secure a licence to provide OEM or REM for non-national aircraft. — AmInvestment Bank, Dec 2