This article first appeared in The Edge Malaysia Weekly on November 15, 2021 - November 21, 2021

Last Monday, Pecca Group Bhd scrapped a RM100 million deal to acquire a 51% equity interest in personal protective equipment (PPE) supplier Rentas Health Sdn Bhd.

This comes as it believes that the existing healthcare-related business — the manufacturing of medical-grade face masks — is not expected to contribute 25% or more to its net profit in the near term.

After the termination, Pecca’s share price gained 6.4% over the week. Was it a reflection of shareholders’ support for the decision?

The acquisition was first announced in August this year to tap Rentas Health’s customer base and distribution networks. Nonetheless, given the low entry barrier to the Covid-19 test kits and PPE segment, it raised concerns over the profitability and margins from the deal.

Being a related-party transaction, the deal also came under scrutiny as Pecca was to acquire the stake from Teoh Zi Yuen — the daughter of its founder and managing director Datuk Teoh Hwa Cheng — albeit with a profit guarantee.

Market competition has caused the prices of test kits and masks to fall amid the transition from a pandemic to an endemic stage. Therefore, it would be more prudent for Pecca to conserve cash for the potential expansion of its automotive segment. This is despite the fact that it has been looking to diversify to reduce its reliance on its existing core business — the styling, manufacturing and installation of leather upholstery for seat covers used in the automotive and aviation industries.

Financially, Pecca has been on a strong financial footing over the years. For the financial year ended June 30, 2021, its net profit doubled to RM19.23 million from RM8.39 million. It also commands a market share of more than 50% of the domestic leather upholstery business.

Perhaps, a more aggressive expansion into the overseas markets could help sustain the company’s business growth as more than 80% of its revenue is still derived from the Malaysian market currently.

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