05 April 2016 IPO Note Pecca Group Berhad Perfecting the leather upholstery business Fair Value (FV): RM1.60 INVESTMENT HIGHLIGHTS Growing capacity to 170,000 by 1QFY17 Expanding retail reach in 2 years Strengthening foothold in Thailand Eyes aviation leather upholstery segment FV of RM1.60 based on PER of 13x FY17F EPS Growing capacity to 170,000 by 1QFY17 from 120,000 currently. Under its biggest revenue contributor, the group sets sight on increasing volume by 50,000 as it plans to build an additional storey at its current factory facility. Assuming a utilisation rate of 70%, the company is expected to make RM132.27m from the sale of car upholstery sets in FY17. We expect this segment to remain its biggest revenue generator, contributing about 85% to its topline. Pecca s OEM contracts signed with first tier seat makers usually range from 2 to 2.5 years, thus providing earnings visibility. Setting up 50 outlets to serve the retail segment in 2 years. Through its arm Everest Empire, the group intends to capture the retail segment by setting up centres near car showrooms to target new car buyers who want to install leather programme. It could also tie up with car accessory players to expand its network so that it can reach out to retail customers more effectively. As of 2015, only some 35% of locally assembled passenger vehicles are equipped with leather seats. It will be selling its Smart Fit and Quick Fit products for the retail segment. Margins for the retail segment could be more lucrative due to the similar cost of production compared to the OEM segment while ASP should be higher. Strengthening foothold in the Thai market. Pecca is supplying Smart Fit covers to Mitsubishi and Nissan in Thailand from its plant in Malaysia. It plans to set up an operation in Thailand to provide after sales support to its Thai customers. By establishing a local entity in Thailand, it will also get the value added tax waiver, which will further enhance its margins besides lower logistic expenses. The sizeable market and Asean auto hub status of Thailand presents vast opportunity for future growth in that country. This could potentially diversify Pecca s source of geographical income as the Malaysia market makes up 81% to 90% of its revenue in the past three years. RETURN STATS IPO Price Fair Value Expected Share Price Return RM1.42 RM1.60 +12.68% Expected Dividend Yield +3.47% Expected Total Return +16.15% STOCK INFO Existing number of shares 140.2m Number of new shares upon listing Listing Syariah Compliant Market Cap upon IPO IPO TIMETABLE 188.0m Main Market Yes RM266.96m DATE Opening of application 29 Mar 2016 Closing of application 5 April 2016 Balloting of applications 7 April 2016 Allotment of shares 18 April 2016 Listing on Main Market 19 April 2016 Utilisation of Proceeds Amount (m) Working Capital RM27.0 (40%) Capital expenditure RM18.8 (28%) Repayment of borrowings RM17.1 (25%) Estimated listing expenses TOTAL Major Shareholders (%) RM5.0 (7%) RM67.9 MRZ Leather Holdings SB 45.6 Datuk Teoh Hwa Cheng 5.4 MIDF RESEARCH is a unit of MIDF AMANAH INVESTMENT BANK Kindly refer to the last page of this publication for important disclosures
Getting approval for aviation leather upholstery from the Department of Civil Aviation will enable the company to get jobs to supply to commercial airplanes in the future. In March, its 60%-owned PAviation, has received the approval on the part refurbishment scope. Now, it is pending approval for the aviation leather upholstery scope, which is expected by end-2016. We value the stock at RM1.60 based on PER 13x FY17F EPS of 12.31. Our 13x forward PER is pegged to a 15% discount to Interhides PCL s forward PER of 15.4x. Interhides PLC is an integrated upholstery player listed in Thailand. Our 15% discount ascribed is to reflect the smaller market cap of Pecca. INVESTMENT STATISTICS FYE Jun FY13 FY14 FY15 FY16F FY17F Revenue (RM m) 66.1 99.55 129.54 130.24 155.61 Pretax Profit (RM m) 12.62 18.79 23.77 27.16 30.45 Net Profit (RM m) 10.54 14.48 17.86 20.64 23.14 EPS (sen) 5.61 7.70 9.54 10.98 12.31 EPS growth (%) 86.88% 37.36% 23.91% 15.07% 12.10% PER (x) 25.33 18.44 14.88 12.93 11.54 Net Dividend (sen) 5.61 7.70 9.54 4.39 4.92 Net Dividend (%) 4.0% 5.4% 6.7% 3.09% 3.47% Source: Company, MIDF Research Forecast BUSINESS OVERVIEW Background Market leader for leather seats commanding 68% market share in the local market for 2015, 65% in 2014 and 58% in 2013. Its main businesses are styling, manufacturing, distributing and installing leather car seat covers and accessories. The company was started by group managing director Datuk Teoh Hwa Cheng and executive director Sam Chee Keng in 2000. Its main products, leather car seat covers, are sold through three segments: original equipment manufacturers (OEM), pre-delivery inspection (PDI) and replacement equipment manufacturer (REM). On top of that, it also supplies leather cut pieces to the OEM segment. Since 2010, the group has been operating from its 4-storey facility, which has a factory area of 89,896 sq ft in Kepong. It plans to expand the existing building by another storey to increase its production area, allocating RM5m for the enlargement and RM7.55m to buy new machineries. Its three business segments is summarised as follow: OEM PDI REM Leather seat covers are embedded as part of the standard car accessories for selected variants of the car models launched by the car manufacturers, supplied to their appointed Tier-1 car seat manufacturers for their onward installation onto the bare seats Leather seat covers are installed at the PDI area where there are requirements by car manufacturer s distribution centre to further accessorise the car interior and to change the original fabric car seat upholstery with leather in order to enhance the value of a car Car seat covers are supplied as after-market accessories to car showroom or sales agents locally or via distribution partners for export sales Source: Company 2
Company structure The group derives more than 80% of its revenue from the local market through all three segments with OEM as its biggest income generator, raking in 65.6% to its topline in FY15. It exports to Australia, Netherlands, USA, Singapore, New Zealand, Thailand, UK, Japan, Indonesia and Mauritius through the PDI and REM segments. Its main customers are as follow: Customer Car Models Length of relationship Fuji Seats (Malaysia) Sdn Bhd Perodua Alza, Viva, Myvi and Axia 12 Tan Chong & Sons Motor Nissan Serena, Grand Livina, Almera, X-Gear, 9 Company Sdn Bhd X-Trail and Navara Lear Automotive Malaysia Sdn Bhd Proton Exora, Persona and Preve 9 Auto Parts Manufacturers Co Sdn Bhd Mitsubishi Motors (M) Sdn Bhd Hyundai Santa Fe, Elantra Proton Satria Neo R3 and Iriz Nissan Grand Livina Mitsubishi ASX, Triton, Attrage, Lancer, Pajero, Mirage and Grandis Perodua Sales Sdn Bhd Perodua Myvi, Alza, Viva 6 Toyota Boshuku UMW Sdn Bhd Toyota - Vios, Camry, Fortuner and Hilux 4 Source: Company 6 6 3
FINANCIAL HIGHLIGHTS 3-year net profit CAGR of 46.9% on the back of revenue CAGR at 27.8%. Net profit increased from RM5.64m in FY12 to RM17.86m in FY15 while revenue was up from RM62.13m in FY12 to RM129.54m in FY15. It targets to increase in-house design car seat covers going forward and that will fetch better margins. It also plans to improve its revenue stream from new businesses such as penetrating into the retail segment, strengthening market presence in Thailand and venturing into the aviation leather upholstery business. Stable double-digit net profit margins should be sustainable due to the higher volume, hence efficiency. Note that its utilisation rate has improved from 75% in FY14 to 83% in 2015 while production capacity stood at 120,000. Source: Company Cash position should remain strong as it recorded net cash of RM19.7m as of Nov 2015. Its net cash is expected at RM48mil post IPO. The company has also allocated RM17.1m or 25% of its IPO proceeds to pare down debts. That will turn it into a net cash company. Besides that, its trade receivables period has improved from 115 days in FY12 to 77 days in FY17 while trade payables turnover period remain relatively stable at 53 days in FY12 compared to 56 days in FY15. That should provide some improvement for its cashflow. Dividend policy of 40% PAT payout recommended subject to shareholders approval. The company plans to pay out 40% of its profits to reward shareholders. Note that it has been paying out dividends in the range of 46% to 67% in the past four years. The proposed payout ratio of 40% should be viable due to its net cash position. Assuming a payout ratio of 40%, we expect dividend yield to be 3.09% in FY16F and 3.47% in FY17F. VALUATION We value the stock at RM1.60 based on PER 13x FY17F EPS of 12.31. Our 13x forward PER is pegged to a 15% discount to Interhides PCL s forward PER of 15.4x. Interhides PLC is an integrated upholstery player listed in Thailand. Our 15% discount ascribed is to reflect the smaller market cap of Pecca. We reckon that the valuation is justified by the company s 3-year net profit CAGR of 46.9%, net cash of RM48m post- IPO as well as the company s future expansion plans. In the nearer term, we expect earnings to grow by 15.07% in FY16F and 12.1% in FY17F supported by car manufacturers increasing demand to equip cars with leather seats to attract buyers. 4
KEY INVESTMENT RISKS Fluctuation in leather hide prices and USD. Leather hide is Pecca s main raw material, accounting for ~60% of its total sales cost. While leather hide price trends have been favourable for Pecca due to the softer demand for luxury goods especially in China, any changes in the price fluctuation will hurt its margins. As the commodity is traded in US dollar, a weaker ringgit will impair Pecca s purchasing power, and vice versa. Overall, raw material makes up about 80% of Pecca s total sales cost. But this should be mitigated by the review of prices with its customers in every three to six months. Shortage of skilled and foreign labour could impact Pecca s operations as it is a labour intensive manufacturing business. Of its total workforce of 510 employees, 323 or 63% are foreign workers. We understand that most of its foreign employees are already getting more than the minimum wage so the company should be shielded from the minimum wage revision in July. However, it will have to absorb about RM200,000 from the recent levy hike imposed on foreign workers in the manufacturing industry. Syed Muhammed Kifni Ng Bei Shan ng.bs@midf.com.my 03-2173-8461 5
MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY TRADING BUY NEUTRAL SELL TRADING SELL Total return is expected to be >15% over the next 12 months. Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -15% and +15% over the next 12 months. Total return is expected to be <-15% over the next 12 months. Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE NEUTRAL NEGATIVE The sector is expected to outperform the overall market over the next 12 months. The sector is to perform in line with the overall market over the next 12 months. The sector is expected to underperform the overall market over the next 12 months. 6