Highlights

• Pecca is involved in the styling, manufacturing, distribution and installation of leather upholstery for car seat covers and trims and leather cut pieces for the automotive industry.
• Main customers include automotive seat manufacturers (Fuji Seats, Toyota Boshoku, Lear Automotive, Auto Part Manufacturers, etc.), which in turn supply car seats to Automotive OEMs (Perodua, Toyota, Proton, Nissan, etc.).
• Current plant utilization is high at 86.0%. Its capacity expansion to 170k units (from 120k units) will complete by end 2017, in order to meet the anticipated growing demands.

Catalysts

• Growth of TIP & TIV: Pecca is the major beneficiary of the growing Malaysia automotive industry, driven by recovery of domestic demand (YTD growth of +3.3% yoy) and potential growth of export market (Malaysia as export hub for regional market). Pecca is the largest car leather upholstery supplier with 67.7% market share in Malaysia, with Perodua, Toyota, Nissan, Honda and Proton as key clientele.
• Increasing Leather Program: OEMs have been increasing their leather program over the years to boost sales volume as the competition intensified. The market share of leather car seats rose to 28% of TIV in 2016 (vs. 15% in 2013). Going forward, we expect OEMs to continue adapt higher leather program for new model introduction as the market becomes more competitive and demanding, benefiting Pecca as the Malaysia’s largest automotive leather upholstery player.
• Penetrating Aviation Market: Newly set up 60% owned PAviation has started working with Malindo and AirAsia. The unit is expected to turnaround in 2018 with new orders secured from the airlines. Malaysia-based airlines have a total fleet of 362 aircrafts with circa 68k seat capacities.
• Export Market: Pecca continues to explore export market, which contributed 19.6% to group revenue in 9MFY17. Current growth is driven by Singapore market and is expected to be sustainable in coming years, while its new Thailand JV continues to gather growth momentum, albeit from small base.
• Penetrating Retail Market: Pecca will leverage on Llumar tint dealers which has 52 retail presence throughout Malaysia, in order to penetrate the huge and relatively untapped retail market. Malaysia has a population of over 12m units of passenger cars on the road (estimated 80% are fabric seats) and 500k units of passenger + pick-up trucks TIV per annum (estimated 65-70% are fabric seats).

Risks

• Increase in cow leather hide price.
• Depreciation of RM.
• Margin squeeze by OEM clients.

Forecasts

• We expect Pecca to achieve 2-year earnings CAGR of 12.0% for FY17-19.

Rating/ Valuation

• We initiate coverage on Pecca with BUY rating. Our Target Price of RM1.88 is based on P/E of 18.0x on FY19 EPS, due to strong earnings growth potential (CAGR 12.0% for FY17- 19) and net cash of over RM90.0m (ex-cash P/E of ~13.0x for FY19), and potentially higher dividend payout.

Source: Hong Leong Investment Bank Research - 27 Jul 2017