Is Pecca Group Berhad (KLSE:PECCA) Overvalued or Just Expensive?

The valuation of Pecca Group Berhad (KLSE:PECCA) has become a subject of debate among investors, particularly as the stock trades at a premium to intrinsic value estimates derived from discounted cash flow (DCF) analysis. To assess whether the company is overvalued or merely expensive, we must dissect its financial fundamentals, growth prospects, and cost of capital against the backdrop of its current market price.

DCF Valuation: A Cautionary Signal

According to Alpha Spread, a financial analytics platform, the intrinsic value of Pecca Group Berhad under its Base Case scenario is estimated at 1.54 MYR per share, while the stock currently trades at 1.7 MYR, implying an overvaluation of approximately 9%. This discrepancy arises from a DCF model that incorporates a weighted average cost of capital (WACC) of 0.91%, one of the lowest in its sector. The company's levered free cash flow (FCF) for the trailing twelve months (ttm) stands at 44.11 million MYR, and the 2025 annual report explicitly states a positive FCF of 46.81 million MYR, reflecting robust cash generation after capital expenditures.

However, the DCF model's output of 1.96 MYR as an intrinsic value-averaged with a relative valuation of 1.13 MYR-hinges on optimistic assumptions about future cash flow growth. The company's projected revenue growth of 9.5% annually over the next three years, while slightly below the 10% industry average for auto components in Asia, is still impressive given its recent performance. Yet, this optimism must be tempered by the fact that Pecca's revenue declined by 7.4% in 2025 to RM224.5 million, despite a rise in net income to RM57.7 million, driven by cost-cutting measures. Such volatility raises questions about the sustainability of its profit margins and the reliability of long-term cash flow projections.

Relative Valuation: A Mixed Picture

Relative valuation metrics further complicate the analysis. While Alpha Spread's relative valuation model suggests a lower intrinsic value of 1.13 MYR, this figure likely reflects sector-wide multiples rather than Pecca's unique strategic position. The company's transformation into a "comprehensive interior solutions provider" for automotive, aviation, and locomotive segments, as outlined at its 15th Annual General Meeting in November 2025, could justify a premium valuation if its expansion projects succeed. However, the market's current pricing assumes a degree of confidence in these initiatives that may not yet be warranted, given the recent revenue contraction and the cyclical nature of the auto components industry.

Strategic Risks and Rewards

Pecca's strategic pivot into new markets is ambitious but carries inherent risks. The company's improved profitability-evidenced by a 26% profit margin in 2025, up from 23% in 2024, demonstrates operational efficiency. Yet, profitability alone cannot offset the drag of declining revenues in a competitive sector. The low WACC of 0.91% suggests that investors perceive minimal financial risk, but this may understate the operational and macroeconomic challenges facing the auto components industry, including supply chain disruptions and shifting demand patterns.

Conclusion: Overvalued, Not Merely Expensive

While Pecca Group Berhad's strategic initiatives and cost discipline are commendable, the data suggests the stock is overvalued rather than merely expensive. The DCF model's intrinsic value of 1.54 MYR, combined with a relative valuation of 1.13 MYR, indicates that the market price of 1.7 MYR incorporates assumptions about future growth that may not materialize. The company's recent revenue decline, coupled with its modest outperformance relative to industry peers, does not justify the current premium. Investors should approach with caution, particularly given the sensitivity of auto components firms to macroeconomic cycles. That said, successful execution of Pecca's expansion into aviation and locomotive segments could re-rate the stock in the long term, but such optimism is not reflected in today's fundamentals.