Investment Highlights

• We maintain UNDERWEIGHT on Pecca Group with an unchanged fair value (FV) of RM1.99/share based on sum-of parts (SOP) valuation. No ESG-related adjustments to our FV.

• Pecca has proposed to acquire a 51% equity interest in Rentas Health (a private company involved primarily in the supply of PPE and medical equipment) for a total of RM100.0mil, to be satisfied via: 1) RM50.0mil cash; and 2) RM50.0mil via 11.99mil new Pecca shares at an issue price of RM4.17/share.

• Based on the FY22F profit guarantee of RM11.7mil from Rentas Health (for a 51% equity stake), the price tag of RM100.0mil effectively values the acquisition of Rentas Health at about FY22F P/E of 8.5x, which we see as reasonable.

• It is important to note that we classify this deal as a “related party transaction” as Rentas Health is 99.99%-owned by Pecca’s managing director and substantial shareholder Datuk Teoh Hwa Cheng’s daughter, Teoh Zi Yuen.

• Prior to the acquisition, Rentas Health was actually Pecca’s client i.e. Pecca primarily recognises revenue from its healthcare segment by manufacturing PPE products (face masks, face shield, jumpsuits etc.). Rentas would then distribute these products. Based on our understanding, post acquisition, Pecca’s PPE manufacturing business, combined with Rentas’s distribution business would form the group’s healthcare division.

• Based on our estimates, the acquisition would enhance Pecca’s FY22F EPS by about 40% underpinned by Rentas’s additional business which would come from the distribution and selling of PPE and medical equipment. Hence, we are positive on this deal.

• Our estimates reflect: (1) the full dilution from the enlarged share base of 195mil shares from the deal; and (2) an additional ~RM11.7mil contribution at the PATAMI level from the acquisition of Rentas Health based on our estimates.

• Also, based on our estimates, following the acquisition, Pecca’s net cash position will drop to RM18.5mil from RM68.5mil as at 31 Mar 2021. This translates to about RM0.10/share.

• Post-acquisition, our FV shall increase to RM2.87/share (from RM1.99/share currently). The basis of our potential revised FV is an additional RM11.7mil on the net level from the healthcare business. We will not be factoring in these additional profits and potential FV pending completion of the deal.

• We maintain our view that while we are optimistic on Pecca’s immediate outlook due to: i) the ongoing SST exemption – which will bolster consumer demand for vehicles; and ii) Proton’s monstrous growth and Perodua’s dominance in the domestic auto sector, valuations are unattractive and have gone way ahead of fundamentals at 34–33x FY21–22F earnings. Maintain UNDERWEIGHT.

• We only value the group’s healthcare segment at a P/E of 13x – which is at a discount to our in-house healthcare sector average of 30x for FY22F due to: 1) Rentas’s smaller size; and 2) its healthcare products being at the lower end of the supply chain.

Source: AmInvest Research - 3 Aug 2021