PECCA Group Bhd’s latest related party transaction (RPT) involving Rentas Health Sdn Bhd seems to be a reversal of its earlier stance whereby distribution of its medical and personal protective equipment (PPE) products had been given to the latter so that Pecca can focus on its core business of manufacturing leather products for the automotive industry.
In mid-2020, Pecca had clarified that the reason for outsourcing the distribution responsibility to Rentas Health was because it wanted to reduce its overall business risk while the deal is also an arm’s length transaction between Pecca and Rentas Health.
“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,” commented Hong Leong Investment Bank (HLIB) Research analyst Daniel Wong in a company update.
Yesterday (Aug 2), Pecca whose core business is in the manufacturing of leather products for the automotive industry announced that it has embarked on a RPT vis-à-vis its acquisition of a 51% stake in Rentas Health for RM100 mil.
The purchase will be satisfied via a combination of RM50 mil cash and issuance of 11.9 million new ordinary shares in Pecca at RM4.17/share to Teoh Zi Yuen who is also the daughter of Pecca’s group managing director and founder Datuk Teoh Hwa Cheng and executive director Datin Sam Yin Thing.
The deal comes with a profit guarantee of RM23 mil on Rentas for FY6/2022 while the acquisition price represents price-to-earnings ratio (PER) of 8.53 times based on the profit guarantee and the 51% equity interest to be acquired by Pecca.
Rentas recorded a profit of RM7.1 mil for the 11-month FPE (forward price-to-earnings) May 31, 2021. The company produces COVID-19 test kits and personal protective equipment (PPE) and other related products, notably face masks, coveralls, jumpsuits, face shields, hand sanitiser and disinfectants.
All-in-all, HLIB Research maintained its “sell” call on Pecca with an unchanged target price of RM2.00 based on PER of 15 times on the company’s CY2022 profit.
“While, we are positive on Pecca’s leverage on the strong rebound in TIV (total industry volume) during the SST (sales and services tax) exemption period as well as the new PPE venture, we believe current share price has overshot the group’s earnings fundamentals,” opined the research house.
TA Securities Research which is neural on the acquisition noted that Pecca is in a net cash position of RM68.5 mil as of March 31 this year March.
“The RM50 mil cash consideration will reduce the cash pile substantially and Pecca may have to gear up to fund the acquisition,” projected analyst Angeline Chin. “Meanwhile, our back-of-the-envelope calculation reveals that the acquisition may increase Pecca’s FY6/2022 earnings by 34.3% with the profit guarantee of RM23 mil after considering the increase in interest cost for the acquisition.”
While the acquisition will help to enable Pecca to extend its product range and provide an additional revenue stream to the group, the research house cautioned the profit guarantee of merely one year and no proven operating track record (commenced on 20 March 2020) from the company may expose Pecca to some business risks.
As a whole, TA Securities Research also accorded Pecca a “sell” rating with an unchanged target price of RM2.50 based on CY2022 PER of 16 times.
At 10.18am, Peccca was up 7 sen or 1.69% to RM4.21 with 1.04 million shares traded, thus valuing the company at RM791 mil. – Aug 3, 2021
