Post 3QFY21 briefing, we expect Pecca’s earning fundamentals remained stable into 4QFY21. The group will continue to leverage onto the strong car sales demand as SST exemptions extended to 30 Jun 2021 and strong demand for PPE products. Management guided M&A exercises are still on-going and expected some conclusions by end of FY21. However, we remained relatively conserved for FY22. Maintain SELL recommendation with unchanged TP of RM2.12, based on PE 15x on CY21 profit, as we believe current share price is ahead of the group’s earnings fundamental.

9MFY21 earnings recap. 9MFY21 core PATMI jumped by +96.3% YoY to RM17.8m mainly driven by stronger of car seats production amidst higher car sales during SST exemption period in Jun 2020-Jun 2021 as well as new contribution from PPE manufacturing (mainly face mask) since 2QFY21.

Leather car seats. Management guided production rate achieved new high 15-16k sets/mth in 3QFY21 due to strong demand for new cars during the year end quarter. Despite the global chip supply disruptions, management guided Pecca will not be materially affected as the group supplies to mainly unaffected models. However, we are relatively surprised by the significant drop of the average selling prices to RM690/set from historical RM900-1,000/set, despite management clarified that the drop was due to higher volume mix to lower margin Ativa model during the quarter.

New PPE. Since commencement in Aug 2020, Pecca continued to ramp up PPE sales, contributed RM5.8m to 3QFY20 revenue. Management guided a net margin of 13% for the quarter. Pecca has not been able to fully capitalize on its capacity due to labour constraints. Hence, management is shifting focus onto higher margin products. Its sole distributor Rentas (privately owned) is exploring new sales channel and online platforms to market reach in targeting medical and retail customer segments.

Higher operating costs. A year has passed since the Covid-19 pandemic and implementation of Pecca’s austerity measures (severe cost cutting and temporary cut in staff salaries and benefits). Management has now taken reduced measures given the group’s strong performance. We have seen overall margin reduction starting in 3QFY21 despite the stronger group revenue.

M&A plan still on. M&A exercise is still on target and management is hopeful to reach conclusion for some deals by end 2021. The targeted M&A are related to both automotive and PPE segment, which may raise the group’s capability into Tier-1 supplier (automotive) and increase the product range of its PPE segment. Management is likely to fund the acquisition via combination of internal funds (net cash RM68.5m as at end 3QFY21) and debt.

Forecast. Unchanged. Despite management is targeting 5% revenue growth in FY22, we remains conserved on overall car sales post SST exemptions end by 30 Jun 2021 while PPE demands remain fluid post vaccination program by early 2022.

Maintain SELL, TP: RM2.12. Maintain SELL 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 current share price has overshot the group’s earning fundamental.

Source: Hong Leong Investment Bank Research - 31 May 2021