Pecca Group riding on automotive sales growth

PETALING JAYA: HLIB Research has initiated coverage on Pecca Group Bhd with a “buy” rating, riding on automotive sales growth.

It has a target price of RM1.88 for Pecca, due to strong earnings growth potential (compound annual growth rate 12% for FY17-19) and net cash of over RM90 million, and potentially higher dividend payout. This represents an at least 10% upside to Pecca’s closing price of RM1.70 yesterday.

Pecca is the major beneficiary of the growing Malaysia automotive industry, driven by recovery of domestic demand and potential growth of Malaysia as an export market. Pecca is the largest car leather upholstery supplier with 67.7% market share in Malaysia, counting on Perodua, Toyota, Nissan, Honda and Proton as key clientele.

The research house said original equipment manufacturers (OEM) have been increasing their leather programme over the years to boost sales volume as competition intensified. The market share of leather car seats rose to 28% of TIV (total industry volume) in 2016 compared with 15% in 2013.

“Going forward, we expect OEMs to continue adapting a higher leather programme for new model introduction as the market becomes more competitive and demanding, benefiting Pecca as Malaysia’s largest automotive leather upholstery player,” HLIB said.

It added the newly set up 60%-owned Pecca Aviation Services Sdn Bhd has started working with Malindo and AirAsia. The unit is expected to turn around in 2018 with new orders secured from the airlines. Malaysia-based airlines have a total fleet of 362 aircraft with circa 68,000 seat capacities.

Pecca continues to explore the export market, which contributed 19.6% to group revenue in the nine months of FY17. Current growth is driven by the Singapore market and is expected to be sustainable in coming years, while its new Thailand joint venture continues to gather growth momentum, albeit from a small base.

Pecca will leverage on Llumar tint dealers, which has 52 retail outlets throughout Malaysia, in order to penetrate the huge and relatively untapped retail market. Malaysia has a population of over 12 million units of passenger cars on the road (estimated 80% are fabric seats) and 500,000 units of passenger and pick-up trucks TIV per year (estimated 65-70% are fabric seats).

“We expect Pecca to achieve two-year earnings CAGR (compounded annual growth rate) of 12.0% for FY17-19.”