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).

RAM Ratings has reaffirmed the AAA/Stable/- rating of Industrial Bank of Korea’s (IBK or the Bank) RM3 billion Conventional and/or Islamic MTN Programme.

Published on 31 Jul 2017.

RAM Ratings has reaffirmed the AAA/Stable/- rating of Industrial Bank of Korea’s (IBK or the Bank) RM3 billion Conventional and/or Islamic MTN Programme. The issue rating encompasses our expectation of a high likelihood of support from the Government of South Korea (GoK, rated AAA(pi)/Stable/P1(pi) on RAM’s national scale). This is underpinned by the Bank’s public-policy role in developing South Korean SMEs, the GoK’s controlling stake and the Bank’s solvency protection under the IBK Act. The GoK’s direct and indirect stakes in IBK stayed at 55.2% as at end-March 2017. 

As the largest lender to this sector, IBK has a well-established franchise among South Korean SMEs, commanding a solid 23% of the industry’s SME loans as at end-March 2017. IBK’s asset-quality indicators are sound and have remained relatively stable in the last few years. The Bank’s gross impaired-loan (GIL) ratio stood at 1.5% as at end-March 2017 (end-December 2015: 1.3%). Meanwhile, its credit-cost ratio has been hovering around 0.6%-0.8%, i.e. slightly higher than those of its commercial-banking peers, although this is reasonable considering the inherently higher credit risk of its SME portfolio. Notably, the Bank has been less affected by large corporate defaults in the shipping and ship building sectors than some of the other players. We also derive comfort from the Bank’s GIL coverage ratio (including credit-loss reserve), which stood at a strong 165% as at the same date. 

IBK remains primarily reliant on market funding, as demonstrated by its lofty loans-to-deposits ratio of 193% as at end-March 2017. However, we are cognisant of the Bank’s good access to the domestic and international debt capital markets given its linkage to the GoK. In terms of capitalisation, the Bank still lagged its South Korean industry peers, with respective common-equity tier-1 and total capital ratios of 9.6% and 13.3% as at the same date. IBK’s weak profitability - a consequence of its low proportion of non-interest income and relatively high credit cost – further affects its capital generation. That said, we believe that liquidity and capital support from the GoK will be forthcoming if the need arises. 

Analytical contact
Liang Huey Jean
(603) 7628 1124
jean@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my

Malaysia’s First Green Sukuk under SC’s Sustainable Responsible Investment Sukuk Framework

July 2017 / Zulkaedah 1438H A number of market development and regulatory efforts have taken place in the African region in recent years as there is a clear set of potentials for Islamic finance to play a role in African countries to diversify their sources of funding. As the world’s largest untapped growth market for Islamic economy, Africa is expected to attract more Islamic finance players in the future to support the governments’ need for raising capital for infrastructure, improve financial inclusion and stimulate economic activities in the region. OTHER HIGHLIGHTS: Malaysia’s First Green Sukuk under SC’s Sustainable Responsible Investment Sukuk Framework Securities Commission Malaysia announced the issuance of Malaysia’s first green sukuk – an innovative channel to address global funding gaps in green financing - under its Sustainable & Responsible Investment (SRI) Sukuk framework. The framework underlying this first green sukuk is the result of collaboration between SC, Bank Negara Malaysia and the World Bank Group, in an effort to develop an ecosystem to facilitate the growth of green sukuk and to introduce innovative financial instruments to tackle global infrastructure needs and green financing. READ MORE HERE Tadau Energy Sdn. Bhd. Issues RM250 Million SRI Sukuk; The First Green Sukuk in Malaysia Tadau Energy Sdn Bhd has successfully issued RM250 million of Sustainable Responsible Investment Sukuk; the first Green Sukuk issued in Malaysia. Tadau Energy’s Green Sukuk Framework has been certified by the Center for International Climate and Environmental Research – Oslo, Norway (“CICERO”). READ MORE HERE Strategy Paper on Value-based Intermediation: Strengthening the Roles and Impact of Islamic Finance Bank Negara Malaysia in collaboration with the Islamic finance industry today released a Strategy Paper on Value-based Intermediation (VBI). This paper articulates strategies to strengthen the roles and impact of Islamic banking institutions (IBIs) towards a sustainable financial ecosystem. The strategies promote the application of VBI practices which will lead to an improved suite of products and services offered by IBIs - for better facilitation of entrepreneurship, community well-being, sustainable environment and economic growth, without compromising on shareholders’ returns.    READ MORE HERE ICD and Saturna Sdn. Bhd. Launch Sustainable Islamic Fund - Fund Enhances Shariah-Compliant Portfolio With Added Sustainable Aims The Islamic Corporation for the Development of the Private Sector, the private sector arm of the Islamic Development Bank, and Saturna Sdn Bhd, a wholly-owned subsidiary of US-based Saturna Capital Corporation, announce the launch of the ICD Global Sustainable Fund, designed for professional and individual investors who seek to align their investment goals with social values and responsible capital.  The launch of the fund contributes towards wider product sophistication and offerings and enhances Malaysia’s position as the marketplace of innovation, expertise and deal flow. ICD serves as one of the Fund’s seed investors and advisor, while Saturna is the Fund’s investment manager. READ MORE HERE Please log on to www.mifc.com or call +603 26923481 for more information. Copyright © 2017 Bank Negara Malaysia. All rights reserved. DISCLAIMER: The copyright and any other rights in the selection, coordination, arrangement and enhancement of the information in this electronic newsletter are owned by Bank Negara Malaysia. No part of this electronic newsletter may be modified, reproduced or published without prior permission in writing from Bank Negara Malaysia and the relevant copyright owner. Although every effort has been made to ensure the timeliness, accuracy, adequacy and completeness of this electronic newsletter, Bank Negara Malaysia accepts no responsibility or liability for errors or omissions, if any. The information contained in this electronic newsletter is only up-to-date at the time of transmission, and is not exhaustive and may be updated from time to time on the website: www.mifc.com. Bank Negara Malaysia shall not be liable for loss or damage caused by viruses transmitted by this electronic newsletter. Bank Negara Malaysia is not responsible for any unauthorised changes made to the information in this electronic newsletter or for the effect of such changes. Bank Negara Malaysia appreciates any feedback or suggestions for improvement.

US Treasuries: Lowering 10T target

Highlights

• US Treasuries: Lowering 10T target
• Malaysia: Lowering 10-year MGS target
• Malaysia: TBEI 30s and 31s above 5.07% offer short term trading gains
• Thailand: Support for LB226A, LB26DA at 1.85% and 2.42%
• Indonesia: Target 6.95%