FW: Result: Pecca Group (BUY; TP: MYR1.25) - Surprise on the downside

 

 

Good morning,

 

We have a results note on Pecca today.

 

PECCA Group (PECCA MK; BUY; TP: MYR1.25) - Surprise on the downside

• Share price over corrected? Disappointing QoQ revenue growth in 3QFY18 (+4% QoQ) coupled with sharp margin contraction (-3.8ppts QoQ) led to a 29% QoQ fall in earnings. Expecting slower revenue and weaker operating margins due to production yield inefficiency and higher labour cost, we cut FY18-20E earnings by 22%-29%. Correspondingly, our TP is lowered to MYR1.25 (-22%) on unchanged 14.5x CY19 PER (in line with our valuation peg for auto companies). Despite a poor set of results, we believe that the share price may have over corrected. Maintain BUY.
• Double whammy. 3QFY18 net profit of MYR2.0m (-29% QoQ) took 9MFY18 earnings to MYR7.7m (-36% YoY), meeting only 49%/48% of our/consensus full-year forecasts. The shortfall stems from a double whammy: (i) weaker-than-expected revenue growth and (ii) unexpected labour cost escalation. On revenue, despite a strong performance from the OEM division driven by high Perodua Myvi sales, Pecca only reported a 4% QoQ improvement in 3QFY18 group revenue, upset by poor performance seen in all other divisions (i.e. REM, PDI, others). On top of that, the sudden spike in OEM volume came at a cost, in the form of higher labour overtime costs. In addition, Pecca had to bear higher foreign worker levy, effective 1 Jan 2018, for its 250 foreign workers. No dividend was declared this quarter.
• Change in senior management. Together with 3QFY18 results announcement, Pecca also announced the departure of its CEO, Mr Tan Jin Sun, citing that the latter is leaving to pursue other opportunities; Mr Tan holds 450k shares in Pecca Group. Without naming a successor, this sudden departure raises some concerns on (i) the day-to-day operations of the company going forward, and (ii) future direction of the company. However, we note that the founder and Group Managing Director of Pecca, Datuk Teoh Hwa Cheng, remains in the company with no changes in shareholding. We believe that Datuk Teoh, aged 49, would likely take the driver seat in leading the company, going forward. Further clarity should be unveiled in an analyst briefing on 25 May. 
• Valuations are attractive. Down 21% to MYR0.88 since the beginning of this week, this sharp share price contraction is overdone, we believe. Valuations are attractive at 10x CY19 EPS (4.5x CY19 PER excluding its MYR90m net cash as at end-Mar 2018), backed by a 6+% yield (based on 70% DPR). We see this as an attractive point of entry for a stock with Perodua exposure.

 

 

Ivan Yap | Analyst, Equity Research

Maybank Investment Bank Berhad (15938-H)
7^th Floor, Tower C, Dataran Maybank, 1, Jalan Maarof, 59000, Kuala Lumpur, Malaysia

Tel: +603 2297 8612 | Fax: +603 2284 2137
Email: ivan.yap@maybank-ib.com

 

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