PECCA: Strong Operational Momentum and Diversification Initiatives Propel Future Prospects

The latest briefing post-6MFY26 highlights steady operational progress and encouraging near-term prospects for the company. Despite an expected normalisation in the Total Industry Volume (TIV), robust demand across key segments and strategic expansion efforts are set to underpin resilient earnings for FY26E-FY27E.

Performance Review Across Segments

The Original Equipment Manufacturer (OEM) segment remains the primary revenue driver, contributing approximately 84% of group revenue. This strength is largely supported by resilient demand from Perodua, which has revised its production forecast slightly upwards to around 363,000 units. Furthermore, the company is actively pursuing a higher value chain position in Tier-1 seat assembly, evidenced by a new seat assembly line and ongoing audit processes with major automotive players. Capacity expansion at the Serendah plant is also anticipated to support future OEM growth.

The Replacement Equipment Market (REM) segment showed significant growth, with revenue increasing by 61% quarter-on-quarter to RM3 million, accounting for about 4% of total group revenue. This expansion is primarily driven by export growth, particularly in the US market, where cumulative contracts are estimated to contribute RM6-6.5 million annually. Efforts to develop additional product templates for export markets are ongoing.

Pre-Delivery Inspection (PDI) operations contributed approximately 3% of group revenue. While PDI revenue saw a quarter-on-quarter decline, the company continues to expand its presence, notably in Saudi Arabia, with the current contract expected to contribute RM6 million annually. The segment is poised for stable incremental revenue, bolstered by sustained vehicle distribution activity in the Middle East.

The aviation segment, currently contributing around 1.1% of group revenue, experienced a 26% quarter-on-quarter decline in 2QFY26 due to timing of revenue recognition. However, stronger revenue recognition is anticipated in 3QFY26 from ongoing MRO projects and potential participation in the substantial MAG Total Care program, estimated at RM100 million, alongside opportunities from AirBorneo’s fleet renewal. A long-term MRO project from a local airline is also expected to commence, contributing RM1.5 million.

Strategic Outlook and Initiatives

Management is focused on several strategic initiatives to sustain growth. These include the expansion of the aviation segment, increasing contributions from Indonesia, and continued strong performance from Perodua. The company’s move towards full seat assembly and integrated interior solutions, coupled with expansion into higher-margin segments like REM exports and aviation MRO, is expected to mitigate the impact of softer domestic TIV. The group’s disciplined cost management and ongoing capacity expansion, including a new plant in Serendah with an initial phase capacity of 150,000 units by end-2026, are crucial for sustainable growth.

Valuation, Recommendation, and Risks

The investment bank maintains its earnings forecasts for FY26E-FY27E as previous expectations for contributions from all segments have already been incorporated. The target price remains unchanged at RM1.55, based on a 16x target P/E multiple applied to FY27E EPS of 9.6 sen. The recommendation for the stock is maintained at HOLD.

Despite the anticipated normalisation in Malaysia’s TIV for CY2025 (~821k) and CY2026E (~790k), the company’s investment merits include strong national OEM partnerships, ongoing capacity expansion and diversification into higher-margin segments, and an industry-leading margin structure. However, potential headwinds include a modest FY27E dividend yield of approximately 2.3%, the upcoming Open Market Value (OMV) tax revision, competition from lower-cost ASEAN suppliers, and geopolitical uncertainties. Key risks highlighted are high local client concentration, exposure to domestic TIV cycles, and competition from low-cost ASEAN suppliers.