The question of what really constitutes healthcare comes into play in Pecca Group Bhd’s proposed corporate exercise.

The company, which is involved in the styling, manufacturing and installation of leather upholstery for seat covers used in the automotive and aviation industries, is proposing to diversify into the healthcare industry by buying a 51% stake in Rentas Health Sdn Bhd.

Rentas Health started operations in March last year and is principally involved in the supply of Covid-19 test kits and personal protective equipment (PPE).

Pecca is proposing to acquire a 51% stake in Rentas Health for RM100 million, to be paid with a combination of RM50 million in cash and shares issued at a premium to the market price. In return, Rentas Health is giving a profit guarantee of RM23 million for the financial year ended June 30, 2022.

Pecca’s portion comes up to RM11.7 million, valuing its entry into healthcare via Rentas Health at 8.5 times price-earnings (PE) multiple. Compared to pure healthcare companies such as IHH Healthcare Bhd and KPJ Healthcare Bhd that are trading at more than 50 times PE, the valuation is cheap.

But can a company that is in the business of supplying Covid-19 test kits and PPE qualify as a healthcare provider?

Or would it be more suitable to compare Rentas Health with companies that supply materials to the healthcare sector? For instance, the glove manufacturers command a valuation that is down to the low single digits.

Rentas Health is a supplier of materials that is related to the healthcare industry. It operates in an industry where there are no barriers to entry for the supply of such materials.

In the current year of operations, Rentas Health is poised to earn a gross margin of about 24%. Can it sustain such margins in the years to come?