Pecca’s acquisition a reversal on its PPE manufacturing focus


PECCA Group Bhd’s proposed acquisition of 51% stake in Rentas Health Sdn Bhd would enhance Pecca’s financial year 2022 (FY22) forecast earnings per share by about 40% underpinned by Rentas Health’s additional business which would come from the distribution and selling of personal protection equipment (PPE) and medical equipment.

AmInvestment Bank analyst Jeremy Yap noted that post-acquisition, Pecca’s fair value (FV) should increase to RM2.87/share from RM1.99/share currently.

“The basis of our potential revised FV is an additional RM11.7 million 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,” he stated in a report yesterday.

Prior to the acquisition, Rentas Health was actually Pecca’s client.

“Pecca primarily recognises revenue from its healthcare segment by manufacturing PPE products (face masks, face shield, jumpsuits etc). Rentas Health would then distribute these products.

“Based on our understanding, post-acquisition, Pecca’s PPE manufacturing business, combined with Rentas Health’s distribution business would form the group’s healthcare division,” stated Yap.

Meanwhile, Hong Leong Investment Bank Bhd (HLIB) maintained its ‘Sell’ call on Pecca with an unchanged target price of RM2 based on unchanged price-to-earnings (PE) ratio of 15 times of calendar year 2022 profit, as it believes the current share price has overshot its earnings fundamentals.

Analyst Daniel Wong said the research house is positive on Pecca’s leverage on the strong rebound in total industry volume during the sales and service tax exemption period as well as the new PPE venture.

Previously, the reason for outsourcing the distribution responsibility to Rentas Health was because Pecca wanted to concentrate on PPE manufacturing job scope and reduce its overall business risk.

“Furthermore, it was guided that 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,” he said. In hindsight, taking into account the acquisition price tag for Rentas Health, HLIB noted that it would perhaps have been better for minority shareholders if the distribution of its PPE products were kept directly under Pecca from the start.

Wong noted that Rentas Health’s valuation is viewed as unattractive.

“Rentas Health achieved 11-months profit before tax of RM9.34 million up to May in the first half of 2021 (1H21) with an estimated profit after tax between RM7 million and RM7.5 million.

“Based on a profit guarantee of RM23 million for 1H22, the forward PE valuation is estimated at 8.53 times of 1H22,” he said.

He said while the 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 as polymerase chain reaction (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 33.5 million units, declining to 19 million in 2022 and 10 million in 2023.

“While there are no close peer comparisons, we compare it to the nearest available peer — the glove sector, which is trading at an average forward FY22 PE of seven times,” he said.

He added that the 8.53 times valuation is substantially cheaper than the current group’s high PE valuation of 31.2 times.