KENANGA: Reliance Pacific - HOLD - 1 Apr 2008

Reliance Pacific – Acquisitions of Regional Travel Companies (Company Update)



Price: RM0.52

Target Price: RM0.48

Recommendation: HOLD



· Proposed acquisitions. We have noted in our previous report that Reliance Pacific Berhad (RPB) had proposed to acquire nine regional travel companies – 2 each in Australia, Hong Kong, Thailand and 3 in Malaysia with completion expected by 1H 2008. We believe the plans to grow via acquisitions and tap into new markets are necessary for RPB to stay competitive in the long run in a highly fragmented industry.

· Total purchase consideration of RM49m at 9x PER is fair. Gearing of the Group should increase from 0.3x to 0.5x post acquisition assuming 50% bank funding.

· Acquisition is strategic as it allows instant penetration into key markets including China and South East Asia. Besides the opening of new markets and enhancing its revenue stream, the acquisition also allows the Group to be more integrated in terms of product offerings. Increasing its brand awareness and synergies from economies of scale are additional drivers behind the strategic move.

· New source of income. Management expects the acquisitions to enhance the Group’s FY09 bottom line earnings by about RM5.0m. The acquirees’ aggregated FY08 net profit is expected to reach RM3.8m on an annualised basis, from RM3.0m in FY07.

· FY08 and FY09 earnings adjusted. After updates from the recent analysts’ briefing, we are lowering our FY08 net profit by 10.7% to RM22.1m premised mainly on tighter profit margins and delay in profit recognisation of the MICE-related activities. This has also prompted us to adjust lower our FY09 net profit by 5.6% to RM31.9m, after factoring in about RM3.0m and RM2.0m contribution from the acquisition and MICE-related activities, respectively.

· Maintain HOLD on RPB with a Target Price of RM0.48 based on PER of 13x, which is at 32% discount of the hotel industry sector but in line with the current market’s 2008 PER.

· Risks to our recommendation include: (1) Unexpected slowdown in the Malaysia and global economy which will affect the overall consumer spending on travel and (2) Breakout of diseases such as bird flu which could affect the travel industry.







KENANGA INVESTMENT BANK BERHAD (15678-H)

Research Department