KUALA LUMPUR (Sept 4): Hong Leong Investment Bank (HLIB) Research has reaffirmed its "buy" call for Pecca Group Bhd at RM1.21 with a higher target price (TP) of RM1.75, from RM1.28, as it expects the car leather upholstery maker to post stronger earnings driven by its new personal protective equipment (PPE) venture.

"We adjusted our FY21 and FY22 earnings (forecasts for the financial years ending June 30, 2021 and 2022 respectively) by +32.3% and +33.4% mainly to account for the new PPE contribution," HLIB Research said in a note today.

Hence, it is anticipating the group to post a net profit of RM25 million for FY21 and RM26.5 million for FY22. The earnings projections are significantly higher than the RM8.39 million net profit posted for FY20 as Pecca suffered from production disruption and lower demand resulting from the Covid-19 pandemic outbreak and lockdown restrictions.

According to Pecca, it has started the production of three-ply masks at five million to six million units per month, and guided to ramp up production to 25 million per month (300 million per year) by the end of the first quarter ending Sept 30, 2020 (1QFY21) and 50 million per month (600 million per year) by end-2QFY21, which are significantly higher than the initial guidance of 18 million per year due to indicative strong demand orders in both the domestic and export markets.

HLIB Research also noted that Pecca had obtained the ISO 13485:2016 Quality Management System Certificate for the design, development and manufacturing of PPE, and is now awaiting an export permit from the government and certification from the US Food and Drug Administration (FDA) and CE Marking from the European Union (EU).

Meanwhile, its commercial production of N95 masks is expected to commence in October, while for other PPE items, it will start at a later stage.

For the PPE segment, Pecca's management had guided for the gross margin to be in double digits and that it will able to recoup its investment within the first year.

For the leather car seat segment, HLIB Research said Pecca will be able to leverage the strong total industry volume (TIV) during the sales and service tax (SST) exemption period.

It said the group's management had guided for the production rate to normalise back to 10,000 to 11,000 sets per month in September (from 9,000 to 10,000 sets per month in July and August) and expects the volume to be sustained until year end.

"We view there is [some] potential upside in the volume guidance, given the strong demand for new cars during the SST exemption period (with the delivery period up to end-January 2021) and upcoming attractive new launches of the Proton X50, Mitsubishi Xpander and Perodua D55L SUV.

"We note that Perodua has announced a production rate increase to average 25,000 per month in the August to December period (versus the usual 20,000 per month), while Toyota has confirmed to increase its production rate in the same period. At the same time, Pecca’s exports of leather cut pieces to China NJTC (Subaru) also recovered strongly in September," it added.

Pecca shares were one sen or 0.83% higher at RM1.22 at 10.20am today, with some 1.15 million shares done. For the past year, the stock has been trading between 68 sen and RM1.39.