This article first appeared in The Edge Malaysia Weekly on December 23, 2024 - December 29, 2024

Loss-making PUC Bhd (KL:PUC) recently announced it was acquiring digital marketing and business management consultancy Alevate Solutions Sdn Bhd (ASSB) for RM100 million in an all-stock deal.

The digital payment solutions provider had in June stated its intention to buy ASSB and digital money lender Alevate Capital Sdn Bhd (ACSB) for a combined RM200 million in a cash-plus-share deal.

The group has decided not to proceed with the acquisition of ACSB, as the parties were unable to mutually agree on the price.

Nevertheless, PUC is still keen on acquiring ASSB, which reported a net profit of RM4.17 million last year and RM4.25 million in the first 11 months of this year.

Under the new deal, PUC will issue 800 million new shares at 12.5 sen apiece to Tham Lih Chung, the sole shareholder and director of ASSB.

After injecting ASSB into PUC, Tham will emerge as the new single-largest shareholder in PUC, with a 22% stake in the ACE Market-listed company.

The offer price is at a 212.5% premium to PUC’s closing price of four sen last Friday. The counter has been hovering between four sen and six sen over the past 12 months.

While issuing shares at a premium minimises dilution, the 12.5 sen issue price suggests a disconnect between PUC’s current value and its perceived value, at least from Tham’s point of view. Simply put, he believes PUC shares should be worth at least 12.5 sen instead of four sen. Perhaps that has to do with the fact that ASSB would provide a profit guarantee of RM12.5 million over two years.

Now, it is PUC’s and Tham’s job to ensure ASSB delivers the promised profits, which will ultimately determine whether this strategy benefits shareholders in the long term. A strong earnings performance is crucial to reducing the dilutive impacts of the all-stock deal.

PUC already has a huge share base of 2.779 billion. With the issuance of new shares to Tham, it will be expanded to 3.579 billion.

PUC had a share base of 2.373 billion about five years ago. Following a five-to-one share consolidation exercise in March 2020, its share base was consolidated to 474 million.

But after a series of corporate exercises, including private placement and employee share option scheme, PUC’s share base has expanded again. Should this be a cause for concern?

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