Pecca has proposed to acquire a 51% stake in Rentas Health (owned by its major shareholder) for RM100m, with a profit guarantee of RM23m for FY06/22. The price tag and profit guarantee implies a price tag of 8.53x FY06/22 PE, which is higher than glove sector’s 7x (closest comparable). This decision also appears to be a reversal of its earlier stance, whereby distribution of its medical and PPE products was given to Rentas Health so that Pecca can solely focus on manufacturing. On hindsight, perhaps it would have been better for minority shareholders if Pecca had kept the distribution to itself from the start, rather than having to acquire now at a higher price. We still maintain SELL on Pecca with unchanged TP of RM2.00 based on unchanged PE 15x of CY22 profit, as we believe the current share price has overshot its earnings fundamentals.

NEWSBREAK

Pecca has proposed to acquire a 51% stake in Rentas Health, owned by family of its major shareholder (related party transaction – RPT) for RM100m. Rentas Health is principally involved in the supply of medical equipment which includes Covid-19 test kits and personal protective equipment (PPE) and other related products i.e. face masks, coveralls, jumpsuits, face shields, hand sanitizer and disinfectants. The acquisition will be satisfied with RM50m cash and 12.0m new shares in Pecca based on RM4.17/share. There will be a profit guarantee of not less than RM23m for FY06/22 and any lower profits will be compensated (profit difference x 8.53x multiple).

HLIB’s VIEW

Relatively unattractive valuation. 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. While current Covid-19 pandemic remains fluid and has the possibility of becoming an endemic, there is no certainty of long term sustainability for the demand of PPE products as well PCR test-kits, while there is high likelihood of increasing new entries and competition into the market going forward. The outlook statement has also highlighted PCR test kits to peak in 2021 with 33.5m units, declining to 19.0m in 2022 and 10.0m in 2023. While there are no close peer comparisons, we compare it to nearest available peer – the glove sector, which is trading at average forward FY22 PE of 7.0x. Nevertheless, the 8.53x valuation is substantially cheaper than the current group’s high PE valuation of 31.2x.

Reversal in earlier guidance. When Pecca commenced PPE manufacturing back in mid-2020, management clarified that the reason for outsourcing the distribution responsibility to Rentas Heatlh was because the former only wanted to concentrate on PPE manufacturing job-scope and reduce its overall business risk. Furthermore it was guided there would be an arm’s length transaction between Pecca and Rentas Health. However, the proposed acquisition now seems to be a reversal in that decision. On hindsight, taking into account the acquisition price tag for Rentas Health, perhaps it would have been better for minority shareholders if the distribution of its PPE products were kept directly under Pecca from the start.

Forecast. Unchanged, pending approval of the acquisition by minority shareholders.

Maintain SELL, TP: RM2.00. Maintain SELL recommendation on Pecca with unchanged TP of RM2.00 based on PE 15x on CY22 profit. While, we are positive on Pecca’s leverage on the strong rebound in TIV during SST exemption period as well as the new PPE venture, we believe current share price has overshot the group’s earnings fundamentals.

Source: Hong Leong Investment Bank Research - 3 Aug 2021