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

This article first appeared in The Edge Malaysia Weekly on June 24, 2024 - June 30, 2024

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

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

The group is hopeful that at least one acquisition deal will be reached in the coming financial year ending June 30, 2025 (FY2025).

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

“We are also using the same [acquisition] strategy to grow the aviation segment,” Hugo Teoh Zi Yi, executive director of Pecca says.

He adds that Pecca is looking for deals to diversify the aviation segment’s portfolio beyond manufacturing and installation of leather aircraft seat covers. However, it has not yet identified any potential targets.

Pecca had expressed a desire to move up the automotive production value chain two years ago. Foo says the group has no intention of remaining a manufacturer of leather upholstery for car seat covers forever. It is looking to go into the assembly of car seats in the next three years, and then eventually become an assembler of completely knocked-down parts.

“We continue to remain hungry [for acquisitions] as we seek to take the group to the next level after more than 20 years in the production of automotive leather upholstery seat covers. The question is how can we achieve it sooner rather than later,” Foo says.

He adds that the group is looking to pick up a controlling stake in the companies it intends to acquire or form joint ventures. “I’m confident we have the capability to run the operations and in any kind of investments, we want to be in control.”

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

Still, Teoh says the group plans to raise funds in order to expand its businesses into new markets or locations.

“It very much depends on the size of the M&A deal. If it is a mega one, then we will work together with a banker to determine what will be a healthy [gearing] ratio to maintain. That will also help us decide how much capital to raise from the equity market. It could be through a combination of debt and equity financing.

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

Meanwhile, the aviation segment’s prospects appear promising, supported by the European Union Aviation Safety Agency (EASA) certification it had secured in April last year.

“This significant milestone places Pecca as the first company in the region to obtain such licence and position the group as an exclusive supplier of aircraft upholstery for international aircraft manufacturers. Formerly restricted to serving Malaysian-registered aircraft, Pecca can now extend its services to a broader market and command more favourable pricing as well as profit margins for its aircraft upholstery services,” says Apex Securities in a Nov 2, 2023, report.

Foo says Pecca is on track to deliver its first purchase order (PO) “earliest by this month or latest by next month” to service a 180-seat, Europe-registered Airbus A320 passenger aircraft under a memorandum of understanding with France’s Aero Cabin Solutions SAS (ACS), a French aircraft interior specialist.

He adds that the completion of the PO could potentially lead to the signing of definitive agreements with ACS or more orders.

Teoh concurs. “The partnership [with ACS] will help bring in more customers and introduce us to the European market. On top of that, we have started doing our own marketing and participating in automotive shows and exhibitions around the world to promote the group and let the market players know that in Southeast Asia, specifically Malaysia, we are the only aircraft upholstery maker with an EASA licence.”

Looking for distributors to tackle overseas markets

Pecca is on course to report another record-breaking year for FY2024. Its 9MFY2024 net profit of RM40.44 million has already exceeded the RM35.4 million achieved in the entire FY2023.

Foo says the outlook for the automotive segment remains optimistic, driven by the higher total industry volume (TIV) and supported by healthy backlog orders. Malaysia’s annual TIV hit a record high for two straight years, that is, 2022 and 2023. Malaysian Automotive Association data shows that TIV for the first five months of 2024 rose 8% year on year to 328,901 units.

However, industry analysts are anticipating a slight deceleration in TIV growth for 2024, taking into account the withdrawal of sales tax exemption as well as a slower replenishment rate.

Foo is unfazed by this, noting that Covid-19 has led to shifts in consumer behaviour, with more car buyers switching to using leather car seat covers from fabric due to safety concerns and preference for premium interior options. Leather upholstery seat covers currently make up about 30% to 40% of TIV, he says.

The group also expects growth to come from the sale of other accessories such as car floor and trunk mats.

The original equipment manufacturer (OEM) business remains its top revenue generator, accounting for 90% of Pecca’s total revenue last year. Concurrently, Pecca commands about 50% market share in the leather upholstery sector in the country. Its primary OEM customers presently comprise Perodua, Proton, Toyota, Nissan and Mitsubishi.

Despite maintaining its position as a leading automotive leather upholstery maker, Pecca continues to seek out growth in the OEM business, with plans to widen its presence in the premium segment. “Majority of the luxury carmakers are still bringing in their completely built-up vehicles. We are working closely with the government to look into more localisation, such as seat assembly in Malaysia, which will support local vendors at the same time,” says Foo.

Still, the OEM business is expected to see a dip in revenue contribution to about 80% in FY2025, as the group focuses on the other segments for growth.

The replacement equipment manufacturer (REM) segment currently contributes about 6% to 7% to the group’s total revenue, while the aviation segment and PT Gemilang account for 1% and 1%-2% respectively.

Pecca intends to double the REM segment’s contribution to about 15% of its revenue in FY2025. It is also aiming to increase the contribution of the aviation segment and PT Gemilang to 5% each.

It now exports to countries such as the US, Thailand, Australia, Singapore and the Middle East, but Foo believes the representation is still relatively small.

“The last one year, Hugo [Teoh] and I spent a lot of time raising awareness about our brands and venturing into countries like the US, Australia and the Middle East where the automotive sales volume is huge and profit margins [in the aftermarket] in the Middle East are fantastic. Thus, we hope to replicate our success here in these markets within the REM space,” he adds.

He says the group is expected to announce “within the next couple of weeks” a partnership with a US company that will exclusively distribute and promote Pecca’s range of products across the US.  “Apart from the US, we are finalising a couple of these distribution deals in major countries such as Australia, Thailand and the Middle East.”

Indonesia market set to rev up growth

In May last year, Pecca expanded its Indonesia footprint with its acquisition of 80% equity interest in PT Gemilang Maju Kencana, an aftermarket parts supplier, for RM1.9 million cash.

Pecca sees a significant growth potential in Indonesia, leveraging PT Gemilang’s existing customer base that includes brands such as Toyota, Isuzu and Suzuki, as well as extending its services with major carmakers in Malaysia to the market there.

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

Apex Securities says the acquisition aligns with Pecca’s expansion strategy to establish a foothold in the massive and growing market, while at the same time expands PT Gemilang’s product offering by extracting Pecca’s expertise in upholstery seat covers for common vehicle models.

Foo sees minimal capital expenditure spending in Indonesia as PT Gemilang had just moved into a new factory and the plant utilisation rate is less than 50%. “The capacity should be sufficient for us to build up our new business in Indonesia for at least the next one to two years.”

Pecca, which was listed on the Main Market of Bursa Malaysia in 2016, has a dividend payout policy of a minimum 40% of net profit. Its dividend per share stood at 2.4 sen for FY2023 and 3.5 sen for 9MFY2024, translating into a payout ratio of 50.1% and 65% respectively.

On Nov 30, 2023, Pecca shares rose to RM1.34, sending its market capitalisation above RM1 billion for the first time. Its share price has remained unchanged since the beginning of this year to close at RM1.30 last Thursday, valuing the company at RM977.3 million with a price-earnings ratio of 19.35 times.

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