KUALA LUMPUR (Dec 9): Hong Leong Investment Bank Bhd Research (HLIB Research) has maintained its "buy" call on Pecca Group Bhd at RM1.17 with an unchanged target price of RM1.45, and said it expects Pecca to distribute 6.5 sen dividend for FY20 as HLIB Research remains positive on the group's outlook from sustainable domestic sales, which were driven by Perodua and improving import markets.

It said in a note today post 1QFY20 briefing, "The strong earnings of RM4.8 million (+1% q-o-q, +49.3% y-o-y) for 1QFY20 [were] driven mainly by car seat sales to Perodua as well as leather cut pieces export to Subaru in China."

Pecca's management guided volume to sustain for FY20, supported by the continuous demand from Perodua for Myvi, Aruz and newly launched Axia models.

The research house noted that the management is also exploring new programs with both Perodua and Proton, given the expected new model launches in 2020.

The revenue from China's export market has shown strong growth following the commencement of leather cut pieces program to Subaru (China) since 4QFY19 while the Singapore and Europe markets have somewhat slowed down.

HLIB Research stated that Pecca can easily ramp up production in order to meet the potential demand growth.

In regard to the mergers and acquisitions (M&A) related to the automotive sector, the group is hopeful to conclude the exercise in 2HFY20.

"Management is likely to fund the acquisition via combination of internal fund[s] and debt. Its cash coffers stands at RM98.2 million as at end 1QFY20," HLIB Research said.

The group also targeted the application for EASA (European Aviation Safety Agency) licence to be fulfilled by end-FY20. The licence will allow Pecca to penetrate into the lucrative market of aviation leather seats.

It noted that Pecca expects incremental staff costs in FY20 following the increase in number of staff as well as implementation of higher minimum urban wage at RM1,200 (from RM1,100) by the government, effective Jan 1, 2020.

"We expect Pecca to distribute 6.5 sen for FY20 (translating into 5.6% dividend yield)," the research house said as the group assured that its dividend payout policy is still intact.

"We remain positive on Pecca's strong operating cash flow of RM23 million-RM24 million per annum (for FY20-FY22) on top of its current net cash position of RM98.2 million (translating into 53.5 sen/share)," HLIB Research said.

At 10.02am, Pecca shares were flat at RM1.17, giving it a market capitalisation of RM219.96 million.