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Pecca to move up the value chain in bid to double revenue

Pecca to move up the value chain in bid to double revenue

24 Aug 2022

HAVING been in the business of manufacturing leather upholstery for cars for years, Pecca Group Bhd is planning to move up the value chain into a Tier-1 automotive player. This forms part of the group’s three- to five-year business plan to double its top line and achieve RM1 billion market capitalisation status.

“Our plan is quite ambitious. We don’t want to be a Tier-2 organisation just providing leather seat [covers]. Hopefully, we will be able to assemble full seats. We want to come out of a small pond and go into a much larger ocean,” its newly appointed CEO Foo Ken Nee tells The Edge in a recent interview. Prior to his appointment on June 1, Foo had been the group’s chief financial officer from January 2019 to May 2021.

The rise to the top-tier position could be done via mergers and acquisitions, he says. “Whether we do it [assembly of full seats] on our own or through partnerships, we hope to conclude something by this financial year [ending June 30, 2023].”

Currently, Pecca installs leather upholstery car seat covers for major customers such as Perodua, Proton, Mitsubishi, Toyota and Nissan. As the sole leather seat cover supplier for Perodua, Pecca derives more than 25% of its sales from the country’s best-selling car brand.

Between now and March 2023, car makers are expected to deliver 500,000 units and this could be a “tall order” for Pecca to handle, says Foo.

Anticipating increased market demand, the group had earlier acquired a 4.31-acre piece of land in Serendah, Selangor, from UMW Development Sdn Bhd for RM8.45 million to construct its second manufacturing plant. Upon completion by end-2023, the group’s production capacity will double to 40,000 to 50,000 seats per month, according to chief financial officer Yeo Bee Hwan.

“The land was handed over at the end of June, [and] we are getting architects to work on the plan. We are targeting to start construction early next year. About RM20 million has been budgeted to construct the building with another RM10 million to RM15 million for the installation of machinery,” says Yeo.

Foo believes the group’s collaboration with the Malaysia Automotive Robotics and IoT Institute (MARii) will open new doors to other original equipment manufacturers (OEMs) locally and abroad.

Having said that, he says Pecca is at the same time looking to reduce its reliance on the OEM segment, which accounts for 85% of its revenue. Contribution from the replacement equipment manufacturer (REM) segment is less than 15%.

“There are a lot of opportunities abroad for the REM segment. We are in the US, Australia, New Zealand, Singapore and Europe. We expect to get more new customers in the next quarter,” he says, adding that the target is to expand the REM segment’s contribution to close to 25%.

Aviation set to be another key driver

In addition, Pecca has identified the aviation segment as another key revenue driver going forward. However, this is pending approval from the European Aviation Safety Agency (EASA), which will allow the group to supply leather seat covers to aircraft that are registered outside of Malaysia, especially commercial flights. Currently, its customer base is restricted to the Royal Malaysian Air Force, military and private jets.

“The auditors were supposed to come in February 2020. With the reopening [of the economy], we have already re-engaged with them. The EASA committee is now reviewing the process and preliminary works have been conducted,” Foo says.

“There are not many players in the aviation space. We can command much better pricing. For example, an aircraft seat is priced between RM2,000 and RM3,000, but a normal car seat is just under RM1,000.”

Another area Pecca plans to focus on is the electric vehicle segment, for which services can range from the supply of leather car seats to other spare parts such as chargers and batteries.

But to achieve the RM1 billion market cap target within three to five years, much has to be done as its market value was only RM669.6 million based on last Thursday’s closing price of 87 sen.

After rising 1.75% year to date, the stock rose to a six-month high of 87 sen last Thursday after touching a low of 64 sen in July.  

According to Bloomberg, of the four research houses covering the counter, three have “sell” calls, citing stretched valuation, while one is calling a “buy”. The consensus target price is 60 sen.

In the financial year ended June 30, 2021 (FY2021), Pecca recorded a 28.3% rise in revenue to RM144.75 million from RM104.64 million the year before. Its net profit doubled to RM19.23 million from RM8.39 million, with net margins surging to 13.3% from 7.9%.

For the nine-month period ended March 31, 2022 (9MFY2022), net earnings were down 24% to RM14.6 million from RM19.21 million in the same period a year ago, due to the Covid-19 lockdown, which impacted its utilisation rate.

Pecca is scheduled to release its 4QFY2022 financial results on Aug 29. Analysts’ consensus net profit forecast for FY2022 is RM23.35 million, and RM25.45 million for FY2023.

“We saw strong sales in 3QFY2022, and we anticipate 4QFY022 to be at least similar or slightly better. For FY2023, there is a lot of positivity as we have finalised our three- to five-year plan,” Foo highlights.

In FY2021, Pecca paid a dividend per share of 6.9 sen, translating into a dividend payout ratio of 61.9%, well above its committed ratio of 40%.

The automotive segment contributed 87% to Pecca’s FY2021 top line, followed by healthcare (12.4%), aviation (0.26%) and furniture (0.36%). Geographically, Malaysia was its biggest market, accounting for 92.4% of total sales.

Family-run Pecca was founded by Datuk Kelvin Teoh Hwa Cheng, who is also the group’s managing director. His son Hugo Teoh Zi Yi and daughter Kelly Teoh Zi Yuen are the executive directors.

Kelvin has a 3.24% direct stake in Pecca and an indirect stake of 49.63% through his holdings in MRZ Leather Holdings Sdn Bhd.

Meanwhile, on the healthcare segment, Kelly says the group remains committed to its face mask manufacturing business, with no plans to reduce its production lines. The group had ventured into face mask production in 2020 at the height of the Covid-19 pandemic.

“We will continue to find our niche market and target those who want a higher level of protection. The segment has been stable,” she says.

Pecca has been in a net cash position over the years, with almost zero borrowings. As at end-March, its net cash stood at RM73.93 million.

“It is not our intention to keep the cash. We had identified some opportunities before the MCO (Movement Control Order) and now we want to activate all these processes [to get things going],” Foo says.

Pecca is considering various options to raise funds for future expansion, including bank borrowings.

For the company, rising operating costs — as a result of a higher minimum wage and raw material prices — remain at manageable levels. “We have not been spared but, in terms of managing the risk, I would say we are more than happy [compared with] other organisations because of our negotiations with the partners,” says Foo.

He adds that the group has been investing in automated and semi-automated equipment to address the labour shortage.

Source: The Edge Markets

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