PECCA Group (PECCA MK; BUY; TP: MYR2.18) - A slow start

PECCA Group (PECCA MK; BUY; TP: MYR2.18) - A slow start

• Marred by supply chain disruptions. 3QCY16 automotive TIP contracted 7% QoQ, disrupted by a fire incident at a major insulation part vendor’s plant which led to longer production downtime during the public holidays in Sep 2016. As such, 3Q16 Perodua vehicle production only improved by a mere 3% QoQ despite a successful launch of the Bezza model in July 2016. As such, we expect Pecca’s 1QFY6/17 earnings to contract QoQ before picking up in 2QFY6/17 on stronger production. Maintain BUY with an unchanged MYR2.18 TP, pegged at 14.5x CY17 EPS.

• Production overtime to meet order backlog. We expect Perodua’s car production to catch up in 4Q16 in order to meet the ~2 months order backlog for its Bezza model. As at end-Oct 2016, we believe that bookings/deliveries for Perodua Bezza have hit >35k/20k units (~50% adoption for top variant equipped with leather upholstery). While order taking for the Bezza has slowed slightly, demand remains consistent, above our monthly expectations of 7k units.
• Numerous opportunities but execution is key. The setback in Pecca’s automotive segment is temporary as we expect TIV to recover in 4Q16 on the back of aggressive sales campaign in order for the dealers to meet their yearly target. Meanwhile, we continue to be positive on Pecca’s entry into the (i) Thailand automotive market as well as (ii) aviation industry which could potentially unlock the next engine of growth for Pecca. Our earnings forecasts, which have yet to incorporate contribution from these two new segments, are unchanged for now pending further development.