A play on rising adoption of leather car upholstery
Adoption of leather car upholstery is on an uptrend (35% in 2015 from 28% in 2010), but still has ample room for growth given that 65% of locally-assembled passenger cars were fabric upholstered in 2015. As the perceived value of leather upholstery by consumers is usually higher than its cost, car manufacturers have been increasingly offering it to induce sales, rather than cash rebates, which hurt secondary car market values.
Market leader armed with 68% market share
Pecca offers a compelling investment case being the leader (~68% market share in CY15) in an oligopolistic market, with attractive and patented product offerings (i.e. Quick Fit, Smart Fit). It is prudently run by experienced management, and boasts a record 17 years of unbroken profitability. Pecca’s success is attributable to its careful investments and long-standing relationships with key clients (i.e. Toyota Boshoku UMW, Fuji Seats – for Perodua).
Wild cards: Perodua sedan, Thailand, aviation
Post-IPO, Pecca’s net cash coffer should balloon to ~MYR64m (24% of market capitalisation at IPO), opening up various opportunities for future growth (i.e. expansion into retail, Thailand automotive and Malaysia aviation, as well as capacity expansion, and potential M&A). Our 3-year earnings CAGR projection of 19% omits potentials from the Thailand auto and Malaysia aviation ventures. In the near-term, successful introduction of the Perodua sedan model could boost Pecca’s volume beyond our initial estimates (2016F: 15k units starting Aug 2016).
Initiate at BUY with MYR1.90 TP
We like Pecca for its dominance in the domestic market, which still offers ample room for growth. Its prior experience, albeit small, in the Thailand automotive and domestic aviation refurbishment markets provide a solid foundation for future growth. Also, Pecca benefits from low input costs due to weak leather hide prices (Mar 2016: -33% YoY). The shares also offer a decent dividend yield of 4+% (50% DPR). Our MYR1.90 TP is based on 13x CY17 PER, in line w/peers (see ‘Valuation’).
PECCA (5271) - PECCA Group Bhd - Impeccable track record
Source: Maybank Research - 19 Apr 2016
