This article first appeared in The Edge Financial Daily on August 27, 2018

Pecca Group Bhd
(Aug 24, 86.5 sen)
Maintain buy with a lower target price (TP) of RM1.25: Pecca Group Bhd’s financial year 2018 ended June 30, 2018 (FY18) core net profit of RM11 million (year-on-year [y-o-y]: -23.3%) was below our expectations but within the consensus, accounting for 94% and 95% of respective full-year estimates. It registered a decent core net profit of RM2.7 million (quarter-on-quarter: +5.8%; y-o-y: -1.4%) for the fourth quarter of FY18 (4QFY18).

The slight miss in earnings was due to a slower-than-expected recovery in margins. Nevertheless, revenue was in line with our estimate at 102% of the full-year forecast. Furthermore, the earnings before interest and tax (Ebit) margin expanded to 9% in 4QFY18, versus 8.2% in 3QFY18.

This was due to the supply of the Perodua Myvi being better planned, resulting in less overtime and better product efficiency. To recap, bookings for Myvi’s leather variant exceeded expectations as its Advanced Safety Assist system was available exclusively for the leather variant.

That said, the FY18 Ebit margin narrowed dramatically to 9.5% (FY17: 13.5%) as the proportion of original equipment manufacturer (OEM) sales in after-market sales increased to 61% versus 57% in FY17. Note that OEM sales have thinner margins but larger volumes.

Its diversification into aviation and retail segments is going as planned. However, Pecca has yet to secure the licence to carry out leather refurbishment activities in commercial aircraft. Thus, revenue from its aviation division was still low at less than RM1 million for 4QFY18.

Pecca declared a final dividend of three sen per share, which brings the total dividend payout for FY18 to five sen per share. This implies a dividend payout ratio of 85% (FY17: 64%).

We have imputed the FY18 full-year figures into our earnings model. Thus, our FY19/FY20 earnings forecasts have been reduced by 4.5%/3.9% respectively. We also introduce our FY21 earnings forecast of RM18.3 million, which implies a 15.8% core net profit growth.

Going forward, Pecca’s outlook remains decent. A change of the head of the group, coupled with a new Perodua sport utility vehicle launch in FY19, should drive earnings growth in the near term. That said, a sudden jump in margins seems unlikely, unless its aviation or after-market sales pick up.

That said, the group’s massive cash pile and long-term funds totalling about RM90 million (48 sen per share) should cushion any downside risk.

We maintain “buy” on Pecca, with a lower TP of RM1.25 (previously: RM1.30), based on an unchanged 16 times calendar year 2019 forward price-earnings ratio. Pecca’s chunky RM90 million cash pile may result in strategic acquisitions or special dividends, which imply further upside potential. — TA Securities, Aug 24