KUALA LUMPUR (June 5): Affin Hwang Capital has upgraded Pecca Group Bhd to "hold" at 82.5 sen with a higher target price (TP) of 80 sen (from 60 sen) and said the stock price had corrected by 21% over the past three months.

In a note today, the research house said it recently organised a conference call for investors with Pecca, where the management highlighted that the business outlook is likely to remain soft in the medium term. 

"We believe the bad news is priced in," it said.

To recap, Pecca's cumulative nine months ended March 31, 2020 (9MFY20) core net profit fell by 34% year-on-year (y-o-y) to RM9 million, largely due to weak third-quarter (3QFY20) results of RM500,000, its lowest quarterly performance since listing.

"Pecca's 3QFY20 revenue dropped by 33% y-o-y to RM23 million or 26% quarter-on-quarter (q-o-q) to RM23 million, dampened by: i) production disruption from Perodua (estimated at 62% of 3QFY20 car seats sales); ii) a shorter working quarter due to Chinese New Year holidays and the implementation of the movement control order (MCO).

"Pecca's 3QFY20 margin was also squeezed by 15 percentage points to 4.8% due to: i) salary increments; ii) bonus payment to employees; iii) complying with the minimum wage requirement; and iv) lower plant efficiency during the MCO period," it said.

The research house also noted it is anticipating a 55% y-o-y decline in FY20 core net profit, as it foresees a loss-making 4QFY20 for Pecca, following the extension of the MCO until May 11. 

It added that the management had acknowledged that times are still tough, given the economic downturn, while subdued consumer sentiment may hammer demand for cars moving into FY21.

Additionally, Pecca's aviation segment (estimated at less than 1% of 9MFY20 revenue) will still take a back seat for the time being, in its view, as travel restrictions have jeopardised the audit process for the production organisation approvals of the European Aviation Safety Agency. 

"Elsewhere, we learnt that merger and acquisition plans for Pecca have been temporarily put on hold as a result of Covid-19 concerns," it said. 

The research house said Pecca had increased its FY19 dividend per share (DPS) to six sen (from five sen for FY17-18) and it sensed that Pecca intends to maintain this dividend trend to instil investor confidence in the company.

Pecca will need about RM11 million from its existing cash of RM91 million to fund this (or 12% of total cash), it said.

"As such, we raise our DPS assumption to six sen (from four to five sen) for FY20-22, translating into an attractive dividend yield of 7%.

"Historically, Pecca has been generous with its dividends with payouts coming in above its policy of no less than 40% since its listing (an average of 75% over past three years)," it said.

As at 9.43am today, Pecca had risen 3.64% or three sen to 85.5 sen, valuing it at RM160.74 million.