KUCHING: Analysts were positive on Pecca group Bhd’s (Pecca) recent venture into the production of personal protective equipment (PPE), lauding the automotive leather seat interior manufacturer for branching out in a time of opportunity.
Analysts at Affin Hwang Investment Bank Bhd (AffinHwang Capital) saw that Pecca has allocated about RM2.2 million in capital expenditure for the production of face masks, where 70 per cent will be used for the purchase of machineries and the balance is catered for the setup of cleanroom facilities.
“The group has no confirmed orders yet, but believes the ongoing discussion with numerous healthcare supplier distributors, which are targeting clienteles in the commercial and healthcare industry, should bear fruits,” it said on the move yesterday.
“Management believes production of PPE can hit the ground running by 1QFY21, once they have attained all the approvals and certification from the relevant authorities.
“Pecca plans to repurpose two of its existing production lines and leverage on its existing talent for the manufacture of PPE garments; this should help to optimise the underutilised capacity in the near-term.”
In a separate note, AmInvestment Bank Bhd (AmInvestment Bank) saw that the capex for Pecca’s purchase of machineries and the set-up of a cleanroom will be funded by internally generated funds and will thus not have any negative impact on its balance sheet strength.
The group has a net cash position of RM91 million.
“Pecca said that it is in the midst of applying for approvals and certifications from all relevant authorities for the PPE business activities, which will be expected to be fully ready by late July or early August,” AmInvestment Bank said.
The production is expected to commence within 1QFY21. Earnings from the PPE business will start to kick in from FY21 onwards. It also said that all its face masks and PPE garments will be of “hospital grade”, suited for medical and healthcare professionals.
“The annual production capacity, is based on a one-shift daily operation,” it continued. “Raw materials will be sourced from China, and the group has given a guidance of an annual incremental revenue approximately RM25 million at 100 per cent utilisation on a one-shift basis.
“The group expects a “low double-digit net profit margin” from this venture.”
AffinHwang Capital recapped that Pecca’s operations were severely disrupted during the extension of the movement control order (MCO) until Early-May 2020 and shorter working days in May.
“In addition, we gather that Pecca’s current utilisation is still below its pre-MCO utilisation levels of 85 per cent,” it said, adding that these factors reaffirmed its view that Pecca’s 4QFY20 results will likely end in the red.
“We believe Pecca’s FY21E profitability should recover, in view of the maiden contribution from the PPE venture. We are estimating revenue contribution from the PPE venture to range between RM12 million to RM14 million for FY20-21E, considering the barrier of entry to this segment is low and thinning profit margins moving forward.”