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This article first appeared in The Edge Financial Daily on December 10, 2019

Pecca Group Bhd
(Dec 9, RM1.17)
Maintain sell with an unchanged target price (TP) of RM1.14:
Pecca Group Bhd’s revenue for the first quarter of financial year 2020 (1QFY20) increased 28.6% year-on-year mainly attributable to higher original equipment manufacturer (OEM) sales for Perodua Aruz and Myvi car models. Pecca also saw a higher contribution from the leather cut pieces segment, underpinned by higher sales to China. Take note that since last quarter, Pecca has been supplying leather pieces to the Subaru OEM in China. We gathered that Subaru is the only major Japanese automaker without an assembly plant in China.

The share of revenue contribution from car seat covers increased slightly to 85.3% compared with 84.9% in 1QFY19. The share of the supply of leather cut pieces increased one percentage point to 10.36%, but the Others segment decreased from 5.8% to 4.3% as a result of certain phase-out models’ cessation. Again, revenue from car seat covers increased due to new models, face-lifted models and a new project secured.

Perodua remained the top contributor with a 64% revenue share, compared with 39% in 1QFY19 and 60% in 4QFY19. Nissan’s share decreased to 9% from 17% in 1QFY19 due to lower demand for the Nissan X-Trail model. Toyota and Honda’s shares were also down from 17% and 4%, to 4% and 2% respectively, dragged by a slowdown in sales and, for Honda, due to the Certificate of Entitlement restriction. Volkswagen and Proton’s shares remained unchanged at 2% each.

According to the management, the group is still unable to carry out leather refurbishment services for commercial aircraft as the European Aviation Safety Agency is still reviewing its application for a production organisation approval licence. A few hundred thousand euros have been spent to obtain the licence since its inception. Besides this, no further details were given.

The management guided the group is exploring mergers and acquisitions (M&A) in Southeast Asian countries to accelerate growth. According to the management, M&A will complement its existing business in the same industry. The group currently has approximately RM98.2 million in cash with no borrowings. M&A are expected to be funded by debts and cash.

Year to date, Pecca’s share price has appreciated approximately 58%. We believe most of the catalysts have been priced into the share price. The group looks a bit pricey compared with its regional peers trading at below price-earnings ratios (PERs) of 10 times. We reiterate our “sell” call on Pecca with an unchanged TP of RM1.14, based on 12 times calendar year 2020 PER. — TA Securities, Dec 9

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