Pecca Group Bhd Keen on leather upholstery

Transcription

1 Pecca Group Bhd Keen on leather upholstery By The Kenanga Research Team l research@kenanga.com.my INVESTMENT MERIT The leading player in automotive leather upholstery, PECCA is involved in the styling, manufacturing, distribution and installation of leather upholstery of passenger car seats covers for original equipment manufacturing (OEM), pre-delivery inspection (PDI) and replacement equipment manufacturing (REM) market segments, as well as the supply of leather cut pieces for OEM market segment. (Please refer to the overleaf for more details of PECCA s business segments.) PECCA caters to c.68% of the domestic market for the installation of leather upholstery for passenger car seat covers for several large automotive brands such as Proton, Perodua, Toyota, Honda and Nissan. This comprises of around 90% of the Group s revenue which is largely derived from its domestic OEM segment. The remaining c.10% revenue is primarily export-driven and focused on the REM segment to clients in USA, Netherlands and Australia as well as PDI exports to Thailand and Japan. While management guided that PECCA does not enter into any supply contracts with its clients to supply leather upholstery goods, they are confident of PECCA s position as they have been consistently meeting the clients specified quantities and quality. (Please refer to the overleaf for more details of the leather market.) Sales were boosted by expansion in contracts from its more prominent OEM clients in FY14/FY15 and recorded RM99.6m (+50.6% YoY)/RM129.5m (+30.1% YoY) topline, respectively. Its net profit (NP), however, expanded in a slightly slower pace in FY14 with RM14.5m (+37.4% YoY) followed by another +23.9% YoY (to RM17.9m) a year later, no thanks to the fluctuations in leather prices. Despite slower net profit growth, its margin managed to sustain at 13%-15% range, in-line with its historical trend. IPO proceeds to utilise for capacity expansion and penetration into new market segments. Management seeks to enlarge production capacity through by expanding its existing production facilities as well as equipping new machineries. Management is hopeful this would yield an increase in production capacity by c.42%. The utilisation rate of its existing production facilities stands at c.87%. With the additional funding from PECCA s IPO proceeds, management has expressed the Group s direction to venture into additional market segments, being (i) retail market; (ii) aviation market; and (iii) Thailand market, although efforts of entering into these market segments may not fully bear fruit till mid-fye18. (Please refer to the overleaf for more details of PECCA s new market segments and the utilisation of IPO proceeds.) FY16/FY17 forecasts. While major growth catalysts (i.e. aviation market penetration) may only kick-in by FY18E, we project the group to record a steady revenue growth of 9.9%/12.0% for FY16E/FY17E, mainly driven by its new retail segment as well as capacity expansion. Its FY16E/FY17E net profit, meanwhile, is expected to grow by 14.7%/15.0%, respectively, on the back of slight margins expansion. A dividend payout policy of 40% was recommended by the management, which could fetch 4.4 sen/5.1 sen dividend or 3.1%/3.6% dividend yield for FY16E/FY17E, which we think is possible with support from its healthy FCF. Not Rated with a fair value of RM1.52, by ascribing a PER of 12.0x (representing the higher range of its PER-band, which is also in-line with its closest industry peer) on our FY17E EPS of 12.7 sen. We believe the valuation is fair given its 2-year NP CAGR of c.15% which implies a PEG of c.0.8x, backed by its market position and prominent clientele range. However, we do not discount the possibility of further earnings re-ratings in the event PECCA s penetration efforts into the new market segments materialise sooner than expected. Rating Fair Value IPO Price - RM1.42 Kenanga Not Rated RM1.52 Consensus Stock Information Shariah Compliant Yes Stock Name Pecca Group Bhd CAT Code 5271 Industry Industrial Products Industry Sub-sector Industrial Products YTD stock price chg Market Cap (RM m) Issued shares (m) week range (Hi) 52-week range (Low) 3-mth avg daily vol: Free Float Beta Altman s Z-score Major Shareholders MRZ Leather Holdings Sdn Bhd 45.6% Datuk Teoh Hwa Cheng 5.4% Financials FYE Jun (RM m) 2015A 2016E 2017E Revenue EBITDA Profit Before Tax (PBT) Net Profit (NP) EPS (sen) BV/Share (RM) PER (x) Price/BV (x) Net Gearing (x) N.Cash N.Cash N.Cash DPS (sen) Div Yield (%) 3.1% 3.1% 3.6% Peers Comparisons PER (FY17) Div. Yld (%) Mkt Cap (RM m) MBM Resources APM Automotive Average FBMSC PECCA PP7004/02/2013(031762) Page 1 of 5

2 Other salient points A leather-intensive business, PECCA sources most of its high quality leather from Italy and Uruguay to cater to the specifications imposed by its customers, which give rise to the risks of fluctuations in USD rate. Management guided that leather hide prices are determined by global supply and demand and may be volatile. According to IMF Commodity Prices, leather prices fluctuated between USD0.70-USD1.15 per pound from 2013 to early Unfavourable fluctuations often translate to lower margins but may also lead to higher selling prices to customers, which may affect PECCA s competitiveness. However, management also guided that certain customers may nominate suppliers to PECCA for sourcing of leather materials. Such arrangements mitigate exposure to fluctuation in leather hide prices as it provides for customers to reimburse any price differences incurred by PECCA. While PECCA caters to the automotive market, its performance does not necessarily correlate with automotive TIV sales, as there is an increasing proportion of newer passenger vehicle models being fitted with OEM leather or partial-leather seats, away from conventional full PCV seats. In addition, with the current state of the automotive market where fewer cars are sold in lieu of low consumer sentiment and disposable income, automotive distributors compete for market share more aggressively by offering promotional items to incentivise consumer purchases. Such promotional items tend to consist of complementary upgrades to leather seats and fittings, which benefits PECCA s PDI segment. Key risks: (i) product substitution for car manufacturing clients, (ii) stronger-than-expected competition, (iii) unfavourable fluctuation in raw material prices, and (iv) delay in rollout of retail outlets and expansion plans. Corporate Structure Business Overview PECCA is principally involved in the styling, manufacturing, distribution and installation of car seat covers for Original Equipment Manufacturing (OEM), Pre-delivery Inspection (PDI) and Replacement Equipment Manufacturing (REM) market segments. PECCA is also involved in other related business activities such as styling, manufacturing, distribution and installation of car door trim covers and covers for car accessories such as steering wheels, gearshift knobs, handbrake levers, provision of sewing service for fabric car seat covers, provision of wrapping and stitching services and supply of raw material to the automotive upholstery industry. Business Segments PECCA s primary business segments comprise of: OEM leather seat covers are embedded as part of the standard car accessories for selected variants of the car models launched by car manufacturer customers. PECCA supplies such car seat covers to the customers tier 1 car manufacturer for their onward installation. PDI Leather seat covers are installed at the Pre-delivery Inspection area when there is requirement by the car manufacturer client s distribution centre to further accessorise the car interior and changing original fabric car seat upholstery with leather in order to enhance the value of the car. REM Car seats are supplied as after-market accessories to car showrooms/sales agent locally or via distribution partners for export sales. PP7004/02/2013(031762) Page 2 of 5

3 New Market Segments Segment Retail Market Aviation Market Thailand Market Details The Group intends to establish 50 retail outlets across Malaysia for the sales of the REM segment within 24 months from its IPO listing. Management believes it will generates brand awareness and preserve PECCA s patented products by showcasing them and providing demonstrations to clients via these showrooms. Using its technical expertise on leather upholstery, the Group seek to expand its business by venturing into aviation leather upholstery and parts refurbishment through its subsidiary, Pecca Leather Aviation Services Sdn Bhd. Currently, the Group has obtained the approval from the Department of Civil Aviation (DCA) for parts refurbishment and is expected to obtain the same for leather upholstery by the end of This would allow PECCA to cater to aircrafts duly registered in Malaysia or those South East Asia countries which recognise DCA. Thereafter, the Group would seek to obtain certification and related approvals from the Federal Aviation Administration, USA by Obtaining the FAA s approval would permit PECCA to carry out the refurbishment work on aircraft with registration in the USA. Management is hopeful that this would allow the Group to be recognised as an international player which will enhance its profile. While PECCA is already serving the PDI market segment in Thailand, it does not have any physical presence in the country. The Group intends to set up a Thailand JV (49% ownership) with a Thai partner with the requisite exposure in supplying automotive accessories in Thailand with the intent of providing direct sales and marketing support to its Thai clients., Kenanga Research Principal Products PP7004/02/2013(031762) Page 3 of 5

4 Key Customers Utilisation of IPO Proceeds Details of utilisation Amount (RM m) % Timeframe for utilisation of proceeds upon listing Working capital RM Within 12 months Repayment of bank borrowings RM Within 6 months Purchase of new machineries for the production of car leather seat covers RM Within 24 months Construction of an additional storey of production floor area on the existing factory building RM Within 24 months Opening of retail outlets RM Within 24 months Establishment of market presence in Thailand RM Within 24 months Expansion of PAviation business RM Within 24 months Estimated listing expenses RM Immediate Total RM IPO Shareholding Spread Details of utilisation Shareholding Spread m shares % Bumiputra investors Institutional investors Eligible directors, employees and business associates of PECCA Public Investors Total PP7004/02/2013(031762) Page 4 of 5

5 This page is intentionally left blank. This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees. Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies. Published and printed by: KENANGA INVESTMENT BANK BERHAD (15678-H) 8th Floor, Kenanga International, Jalan Sultan Ismail, Kuala Lumpur, Malaysia Telephone: (603) Facsimile: (603) Website: Chan Ken Yew Head of Research PP7004/02/2013(031762) Page 5 of 5