Pecca Group ‘hungry’ for more acquisitions as it moves into higher gear

This article first appeared in The Edge Malaysia Weekly on 24 June 2024 – 30 June 2024.

PECCA Group Bhd (KL:PECCA) is back on the acquisition trail after a hiatus due to the Covid-19 crisis. The car upholstery maker has struck one acquisition deal in the past year and is on the hunt for more as part of its ambition to become a Tier-1 automotive player, says its CEO Foo Ken Nee.

Foo tells The Edge in an interview that more deals are in the pipeline. “We are evaluating a few mergers and acquisitions (M&As) in Malaysia. One is in seat assembly, which will allow us to move up the value chain and become a Tier-1 automotive supplier. We are currently a Tier-2 company.”

The Group hopes that at least one acquisition agreement will be concluded in the upcoming fiscal year ending on 30 June 2025 (FY2025).

The automotive segment is not the only area where Pecca is looking for acquisitions.

“We are using the same (acquisition) strategy to develop the aviation segment as well,” says Hugo Teoh Zi Yi, chief executive of Pecca.

She added that Pecca is looking for deals to diversify its aviation portfolio beyond manufacturing and installing leather seat covers for aircraft, but has not yet identified any potential targets.

Pecca expressed its desire to move up the automotive manufacturing value chain two years ago. Foo says the group doesn’t intend to remain a leather-upholstery maker for car seat covers forever. It plans to move into car seat assembly in the next three years, and then eventually become an assembler of completely disassembled parts.

“We are still hungry (for acquisitions) because we want to take the group to the next level after more than 20 years in leather car seat covers. The question is how we can achieve that sooner rather than later,” Foo says.

He adds that the group intends to take a controlling stake in companies that it intends to acquire or create joint ventures. “I am convinced that we have the ability to conduct operations and in the case of any type of investment we want to have control.”

Pecca can continue to feed its M&A appetite with a strong balance sheet. It has a healthy treasury war chest with a net cash position of RM133.6 million as at end-March 2024.

However, Teoh says the group plans to raise funds to expand its operations to new markets or locations.

“It largely depends on the size of the M&A deal. If it’s a mega deal, we’ll work with the banker to determine what’s a healthy (debt) ratio to maintain. That will also help us decide how much capital to raise from the equity market. It could be a mix of debt and equity.

“Also, the fact that we are not just looking at one M&A, but multiple (deals). Whether the internal funds are sufficient is another question,” he added. Teoh, 31, is the son of Pecca founder and group managing director Datuk Kelvin Teoh Hwa Cheng. Hwa Cheng, along with his wife Datin Christine Sam Yin Thing, who is the group’s executive director, are the largest shareholders, holding 49.63% of the company’s shares through MRZ Leather Holdings Sdn Bhd as of Sept 15, 2023. The couple also hold a direct stake of 3.24% and 6.9%, respectively, in Pecca.

Meanwhile, the prospects for the aviation segment seem promising, as evidenced by the European Aviation Safety Agency (EASA) certificate that the company obtained in April last year.

“This significant milestone makes Pecca the first company in the region to obtain such a license and positions the group as the exclusive supplier of aircraft upholstery to international aircraft manufacturers. Previously limited to servicing Malaysian-registered aircraft, Pecca can now expand its services to a wider market and command more favourable prices as well as profit margins for its aircraft upholstery services,” Apex Securities said in a report dated November 2, 2023.

Foo says Pecca is on track to deliver its first purchase order (PO) “this month at the earliest or next month at the latest” for a 180-seat European-registered Airbus A320 passenger aircraft, under an agreement with French aircraft interiors specialist Aero Cabin Solutions SAS (ACS).

He adds that finalizing the order could potentially lead to the signing of final agreements with ACS or more orders.

Teoh agrees. “The partnership (with ACS) will help us attract more customers and introduce us to the European market. We have also started doing our own marketing and participating in motor shows and exhibitions around the world to promote the group and let market players know that in Southeast Asia, and specifically in Malaysia, we are the only EASA-licensed aircraft upholstery manufacturer.”

Pecca is on track to post another record fiscal year 2024. Its 9M FY24 net profit of RM40.44 million already exceeds the RM35.4 million achieved in the full year FY23.

Foo said the outlook for the automotive segment remains positive, driven by higher total industry volume (TIV) and supported by healthy backlog orders. Malaysia’s annual TIV has reached record levels for two consecutive years, i.e. 2022 and 2023. Malaysian Automobile Association data shows that TIV in the first five months of 2024 rose 8% year-on-year to 328,901 units.

However, industry analysts are predicting a slight slowdown in TIV growth in 2024, given the withdrawal of the sales tax exemption as well as a slower pace of inventory replenishment.

Foo isn’t concerned, noting that Covid-19 has led to changes in consumer behavior, with more car buyers switching from fabric to leather seat covers due to safety concerns and a preference for premium interior options. Leather seat covers now account for about 30% to 40% of TIV, he says.

The Group also expects sales of other accessories, such as car mats and trunk mats, to increase.

The original equipment manufacturer (OEM) remains the main revenue generator, accounting for 90% of Pecca’s total revenue last year. At the same time, Pecca has about 50% market share in the leather upholstery sector in the country. Its main OEM customers currently include Perodua, Proton, Toyota, Nissan and Mitsubishi.

Despite maintaining its position as a leading manufacturer of automotive leather upholstery, Pecca is still looking for growth in the OEM business, with plans to expand its presence in the premium segment. “Most luxury car manufacturers still import their fully assembled vehicles. We are working closely with the government to explore larger localization, such as seat assembly in Malaysia, which will also support local suppliers,” Foo says.

Still, OEM revenue is expected to decline to around 80% in fiscal 2025 as the group focuses on other segments to drive growth.

The Replacement Equipment Manufacturers (REM) segment currently generates around 6-7% of the group’s total revenue, while the Aerospace segment and PT Gemilang account for 1% and 1-2% respectively.

Pecca aims to double the share of the REM segment to about 15% of its revenue by fiscal 2025. It also aims to increase the share of the aviation and PT Gemilang segments to 5% each.

The company currently exports to countries such as the US, Thailand, Australia, Singapore and the Middle East, however Foo believes the market representation is still relatively small.

“Last year, Hugo (Teoh) and I spent a lot of time building awareness of our brands and getting into countries like the US, Australia and the Middle East, where the volume of cars sold is huge and the profit margins (in the aftermarket) in the Middle East are fantastic. So we hope to replicate our success here in those markets in the REM space,” he added.

He says the group is set to announce “in the next few weeks” a partnership with a US company that will exclusively distribute and promote the Pecca range in the US. “In addition to the US, we are finalising a number of these distribution deals in major countries such as Australia, Thailand and the Middle East.”

In May last year, Pecca expanded its presence in Indonesia by acquiring an 80% stake in PT Gemilang Maju Kencana, a spare parts supplier, for 1.9 million Canadian ringgit in cash.

Pecca sees significant growth potential in Indonesia, leveraging PT Gemilang’s existing customer base, which includes brands such as Toyota, Isuzu and Suzuki, and expanding its services to major Malaysian car manufacturers in the local market.

“In Indonesia, we currently have less than 1% of the leather upholstery market share. We can increase it to about 10% to 15% in five years, despite the huge population, because Indonesia has a lower GDP (gross domestic product) per capita compared to Malaysia,” Foo explains. Leather seats are considered a more luxurious option for cars and tend to cost more.

Apex Securities said the acquisition is in line with Pecca’s expansion strategy to establish itself in a huge and growing market, while also broadening PT Gemilang’s product offering by leveraging Pecca’s expertise in upholstered seat covers for popular car models.

Foo sees minimal capital expenditure in Indonesia, as PT Gemilang has just moved into a new plant and the plant’s utilization rate is less than 50%. “The capacity should be sufficient for us to grow our new business in Indonesia for at least another year or two.”

Pecca, which listed on the Main Market of Bursa Malaysia in 2016, has a dividend payout policy of at least 40% of net profit. Its dividend per share was 2.4 sen in FY2023 and 3.5 sen in FY2024, translating to a payout ratio of 50.1% and 65%, respectively.

On November 30, 2023, Pecca shares rose to RM1.34, taking its market capitalization to over RM1 billion for the first time. The share price remained unchanged since the beginning of this year, closing at RM1.30 last Thursday, valuing the company at RM977.3 million at a price-to-earnings ratio of 19.35.

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