• Sime Darby announced that it has received a confidential, conditional, non-binding, indicative proposal from IHH Healthcare (IHH) to acquire 100% of Ramsay Sime Darby Health Care Sdn Bhd (RSDH). RSDH is a 50:50 JV between Sime Darby and Ramsay Healthcare Limited (Ramsay).

• Under the proposal, the conditional indicative enterprise value (EV) for RSDH is RM5,670mil (or US$1.35bil) on a cash-free, debt-free basis. The proposal is subject to conditions for: i) completion of satisfactory due diligence; and ii) negotiation and finalization of a sale and purchase agreement. Sime Darby and Ramsay have agreed to a period of exclusivity for four weeks to allow IHH to conduct due diligence and negotiate a sale and purchase agreement.

• From the valuation perspective, the indicative EV of RM5,670mil implies 25x FY21 EV/EBITDA (vs. IHH’s 14.5x CY21 EV/EBITDA) and RM3.2mil EV/bed. However, note that RSDH’s earnings have yet to fully recover from the impact of the pandemic.

• Our valuation on Sime Darby's 50% stake in RSDH is RM1,969mil (100% equity stake: RM3,938mil) derived from 40x CY22 PER. Imputing the indicative EV value into our sum-of-parts valuation will hypothetically increase our fair value on Sime Darby to RM3.00 (from RM2.90). Sime Darby’s healthcare unit net asset/invested capital stands at RM659mil as of 30 June 2021. Nevertheless, discussions are still in the preliminary stage and no agreement has been reached in relation to the indicative proposed enterprise value.

• The disposal of the healthcare business is in line with Sime Darby’s plan to monetize its non-core assets. The group had previously planned to spin off its healthcare unit but decided to shelve the initial public offering plan due to the pandemic. Sime Darby has disposed of several non-core assets in recent years, such as 307.6 hectares of freehold land in Malaysia Vision Valley for RM280mil, its remaining 10.9% equity stake in Eastern & Oriental for RM93.5mil, and 30% stake in Tesco Stores (M) for RM300mil.

• We maintain our BUY recommendation on Sime Darby with a fair value of RM2.90.

Source: AmInvest Research - 23 Mar 2022