Pros

1. Pecca's recently acquired Rentas Health secured a project worth RM25.2 mil

2. Rentas's PCR Test kit will be used in 21 government hospitals nationwide, including Hospital Kuala Lumpur, Hospital Sungai Buloh and the Sarawak Heart Centre

3. Test Kit venture is in partnership with LG International Corp, with Rentas being the sole distributor for Malaysia

4. Rentas to provide a profit guarantee of RM23m to Pecca for FY06/22

Cons

1. Some deemed the acquisition are overpriced (to be discuss below)

A while back, Pecca has announced the acquisition of 51% stake in Rentas Health for RM50mil in cash and RM50mil in new shares (12mil shares @ RM4.17). Some investors were taken aback as the acquisition was done between Pecca Group's managing director and substantial shareholder Datuk Teoh Hwa Cheng and her daughter Teoh Zi Yuen. Due to this, the market price has consolidated and the price has breach the RM4 resistance at the time of my writing.

It has caught my attention as well given i've been following Pecca closely since last year. While the price has went up 100+% since the time of article, it is still interesting to see what will go down the road regarding this acquistion.

Rentas's Background

A quick google guide will show that Rentas Health is a company involved in the supply of medical equipment which includes Covid-19 test kits and personal protective equipment (PPE). Among some of the stuff that is produces includes coveralls, face masks, jumpsuits, face shields, hand sanitizer and disinfectants etc.

A popular face mask brand under Rentas would be Callie (not sure if anyone tried it, but i prefer Callie's mask as i feel it is more breathable although it is a 4-ply face mask )

At the same time, the company has gotten certification from EU (CE Certification) and recognition from US's FDA. This enables Rentas to export to other oversea countries.

Rentas's Financials

Based on excerpts from HLIB research:

"Rentas Health achieved 11-months PBT RM9.34m up to May in FY06/21 (estimated PAT RM7.0-7.5m). Based on a profit guarantee of RM23m for FY06/22, the forward PE valuation is estimated at 8.53x of FY06/22"

It is very interesting as HLIB has stated that Rentas has achieved a RM9.34mil profit for 11months FY06/21. However, for a 2 year old company (it was founded in 2019), it also interest me that it has made RM9.34mil in a short 2 years time frame.

What really got me looking at it is that How can Rentas guarantee a profit to Pecca of RM23mil for FY06/22 with it's current 11 months profit of mere RM9.34mil?

However, my query was answered today. Apparently, Rentas has secured a RM25.2mil contract from MoH to supply PCR Test kits among the major hospitals in Malaysia.

Assuming a cost Profit Margin of 75% (based on the estimated PAT of RM7mil), Rentas has to make at least RM 30.6mil PBT in order to achieve a guarantee profit of RM23mil. At this juncture, it would seem that Rentas may have more contracts down the road that is either in discussion / yet to be announced.

Pecca's Acquistion of Rentas

HLIB also noted that the PE of 8.53x for Rentas makes the deal seem unattractive. However, as the closest peers that Rentas currently has would be glove sector (i.e. topglove / supermx etc). HLIB also highlighted that the forward FY22 PE for glove sectors is 7.0x, which makes the deal seems unattractive.

This is yet to be seen as during the time of HLIB report, the MoH contract has not been released.

Given the contract win and the coming financials results is yet to be seen, i have a feeling that the acquistion of Rentas would definitely be contributing to Pecca's profitability in the coming years.

Technical Analysis

Technically, the chart has drop below 7, 14 days moving average.

However, it is still strong above 200 days MA (at 2.833). Stochastic RSI has shown that the stock has been oversold.

It has dropped to a low of RM3.59 today (9/8/2021), however, at closing, Pecca has recovered back 19 cents to close at RM3.78.

Summary

In summary, i believe that there is still more news to come given that Rentas would have to achieve a profit guarantee in FY06/22. It would definitely have to bag a few more contracts in order to achieve the profit target.

On top of that, Pecca's current YTD profit has achieved RM 19mil, Pecca would definitely achieve a very very profitable year coming ahead. Couple this with the RM23mil next FY, Pecca will easily make record profit in the coming months/ years.

I would definitely keep Pecca on one of my favourite stock of the year and follow closely for any development. At this juncture, the price seems very very attractive for me to average up my portfolio.

Be fearful when others are greedy and Be Greedy when others are fearful.

- Warren Buffet

*My views does not constitute as a buy/sell call. I'm merely looking and analysing based on available facts.

- Credits to HLIB Research