Monday, July 31, 2017

PECCA Group (PECCA MK; HOLD; TP: MYR1.70) - Limited upside; D/G to HOLD

PECCA Group (PECCA MK; HOLD; TP: MYR1.70) - Limited upside; D/G to HOLD
  • Valuations are fair for now. Pecca’s 4QFY6/17 results, due out on 22 Aug, could disappoint on still suppressed production volumes by its major customers. We lower our FY17/18/19 net profit forecasts by 5%-7% having accounted for (i) lower volumes at the OEM and PDI segments but (ii) partially offset by USDMYR forecasts of 4.25 (from 4.30) average for FY18/19. Correspondingly, our TP is lowered to MYR1.70 (-6%), pegged on unchanged 14.5x CY18 EPS (20% premium to peers). With limited upside, Pecca is now a HOLD.
  • Lower FY17/18/19 earnings forecasts by 7%/5%/5%. While OEM volumes for Perodua Axia and Bezza may have resumed in 4QFY17 following the disruption in 3QFY17 due to facelift introductions, total production at Pecca’s top three customers (i.e. Perodua, Toyota, Nissan) remained suppressed in the quarter, growing just 1% QoQ – below our expectations. As such, we revise down (i) our car seat cover volume forecasts by 5%-7% and (ii) ASPs by 1%-2% to account for less favourable sales mix (higher contribution from Perodua vs. Toyota/Nissan). Partially offset by a lower USDMYR forex forecast of 4.25 (from 4.30) average for FY18/19, we lower our  FY17/18/19 earnings forecasts by 7%/5%/5%.
  • A better year ahead …  We continue to expect FY18 to be a much better year underpinned by stronger volumes mainly from the launch of Perodua’s all-time favourite model, Myvi, by 4QCY17. Also, Pecca’s potential win in the aviation space could see further lift earnings growth going forward; recall that Pecca has secured a specific leather upholstery scope license for the aviation industry from the Department of Civil Aviation in Mar 2016. We have yet to factor in any win by its 60%-owned aviation-supply arm.
  • … but already priced in? Share price has gained 11% in the last 3M in anticipation of better results ahead. Pecca is a potential beneficiary of the Proton-Geely JV but the impact will only be in 2018, we believe. For now, valuations are fair at 14.5x CY18 PER (10.4x ex-cash; MYR90m end-9MFY17).

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