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PECCA (5271) PECCA GROUP BHD - Leveraging Onto SST Exemption

Post 3QFY20 management update, we remain positive on the group’s outlook from sustainable domestic automotive sales, given the implementation of SST exemptions from 15 Jun to 31 Dec 2020. Nevertheless, M&A exercise and EASA licensing are likely to see some delay, dragged by Covid-19 and implementation of MCO. We expect dividend payout in FY20 to stay at 6.0sen (translating into 7.3% yield). Maintain BUY recommendation with higher TP of RM1.28 (from RM1.05), based on higher PE 12x (from 10x) on the adjusted CY21 profits.

We recently had a virtual meeting with Pecca post 3QFY20 results release with the following key takeaways:

3QFY20 earnings recap. The weak 3Q earnings of RM0.2m (-95.1% QoQ, -95.5% YoY) and RM9.2m for 9MFY20 (-28.7% YoY), were mainly affected by the implementation of Movement Control Order (MCO) by mid-March, coupled with slower sales at start of the year.

4QFY20 to worsen. Management guided for a worsening 4QFY20 (potentially loss making), as production was ceased till mid-May. Current capacity utilization is at 70- 80% as major clients are clearing down their high accumulated inventory levels.

Sales tax exemption measures for 15 Jun to 31 Dec 2020 are expected to aid overall car sales volume during this period of weak consumer sentiment. Car prices have dropped by 2-7%, a good discount on top of OEM’s existing promotional sales campaigns. During GST holiday period (Jun-Aug 2018), Malaysia recorded an average of 66k units TIV per month as compare to a normalised 50k units/month. Hence, Pecca is expected to ride on the sales recovery for 1HFY21.

M&A and aviation plan. Both M&A and aviation plans are likely to face some delay, affected by Covid-19 and implementation of MCO (including RMCO until Aug 2020). Nevertheless, management is still hopeful to finalise the M&A exercise (related to automotive industry) as well as acquiring the necessary EASA license to provide MRO services to commercial airlines (including leather seat fixtures) in 1HFY21. Management is likely to fund the acquisition via combination of internal fund and debt. Its cash coffers stands at RM91.0m as at end 3QFY20.

Dividend. Management assured that the company’s dividend payout policy is still intact. We expect Pecca to distribute a final dividend of 3.0sen for 2HFY20, accomplishing full year 6.0sen for FY20 (translating into 7.3% dividend yield). The group has a net cash of RM91.0m (translating into 50.7 sen/share).

Forecast. Cut earnings for FY20 by 2.4% (further drag from MCO), upgraded earnings for FY21 by 8.0% (benefiting from SST exemptions) and FY22 earnings remain unchanged.

Maintain BUY, TP: RM1.28. Maintain BUY recommendation on Pecca with higher TP of RM1.28 (from RM1.05) based on higher PE of 12x (from 10x) of CY21 profits. We remain positive on Pecca’s outlook, benefitting from SST exemption measures as well as the group’s strong net cash position of RM91.0m (translating into 50.7 sen/share).

Source: Hong Leong Investment Bank Research - 24 Jun 2020

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