Post 2QFY21 briefing, we are still relatively positive on Pecca’s earnings outlook into 2HFY21. The group will continue to leverage onto the strong car sales demand as SST exemptions extended to 30 Jun 2021 and also new contribution from the ramping up of PPE manufacturing. However, the potential growth of the group may be affected by major client Perodua (contributed 62.3% to group’s 2QFY21 revenue) production disruption issue, higher operational costs (end of austerity measures), raw materials and freight costs. Maintain HOLD recommendation with unchanged TP of RM2.12, based on PE 15x on CY21 profit.

1HFY21 earnings recap. 1HFY21 core PATMI jumped by +33.8% YoY to RM11.8m mainly driven by stronger of car seats production amidst higher car sales during SST exemption period in Jun-Dec 2020 (now extended to mid-2021) as well as new contribution from PPE manufacturing (mainly face mask) mainly in 2QFY21.

Leather car seats. Management guided production rate stayed high at 11-12k sets/mth in 2QFY21 due to strong demand for new cars during the year end quarter. However, the guided production disruption of major client Perodua (contributed to 63.2% of group revenue in 2QFY21) in March (until further notice) may affect Pecca’s performance in 2HFY21. We expect the demand increase by other OEMs to soften the negative impact of Perodua disruption during the period. New secured contracts include Perodua Ativa and Proton special edition models. Management has also guided for increase in the costing for raw material and freight in upcoming quarters and management is in negotiations with key clients with regards to the raw material costs (not freight costs).

New PPE. Since commencement in Aug, Pecca has achieved utilization of 30-40% in 2QFY21, contributing revenue of RM4.8m. The group continues to expand its distribution network and market in 2HFY21 and has secured a new contract with the government (2 months rolling order), which management guided to ramp up utilization to c. 60%.

Higher operating costs. A year has passed since the Covid-19 pandemic and the implementation of Pecca’s austerity measures (severe cost cutting and temporary cut in staff salaries and benefits) and now management does not foresee the need to extend such extreme measures given the group’s strong performance. Hence, we are expecting step up in operational costs (including administrative and selling & distribution) in coming quarters.

M&A plan still on. M&A exercise is still on target and management is hopeful to provide further updates in 2021. We expect Pecca to only conclude the M&A exercise in 4QFY21. To recap, the targeted M&A is related to the automotive sector. Management is likely to fund the acquisition via combination of internal funds (net cash RM72.4m as at end 2QFY21) and debt.

Forecast. Unchanged.

Maintain HOLD, TP: RM2.12. Maintain HOLD recommendation on Pecca with unchanged TP of RM2.12 based on PE 15x on CY21 profit. While, we are positive on Pecca’s leverage on the strong rebound in TIV during SST exemption period as well as the new PPE venture, we believe the group is now fairly valued with the uptrend of share price.

Source: Hong Leong Investment Bank Research - 9 Mar 2021