Investment Highlights

• We retain our HOLD call on IHH Healthcare (IHH) with an unchanged DCF-derived fair value (FV) of RM7.00 based on a WACC of 7%, terminal growth rate of 3.5% and a 3% premium for our ESG rating of 4 stars.

• IHH Healthcare entered into a conditional agreement to dispose of its entire 100% stake in its medical education arm, International Medical University (IMU) at an enterprise value of RM1,345mil cash to Inbound Education Holdings (IEH), which includes a transfer of an uncompleted hospital to Columbia Asia.

• The shareholders of IEH are Hong Leong Healthcare Group (45%), Singapore's The Rise Fund Inbound SF (45%) and the Employees Provident Fund (10%). This transaction is expected to be completed in 1Q2023.

• IMU operates a university offering pre-university, undergraduate and post-graduate programmes and currently houses clinics offering medical, dental, chiropractic and Chinese medicine services. IMU Education owns 1 main campus in Bukit Jalil, operates 4 clinical campuses and 6 clinics and is currently carrying out construction of a hospital in Bukit Jalil. The group also operates a nursing college and dialysis centre.

• Based on IMU's adjusted EBITDA for FY21 of RM81.4mil, we estimate an acquisitive EV/EBITDA of 16.6x, higher than IHH’s 13.5x currently. The proposed sale will generate a one-off gain of RM902mil, which is 40% of FY23F core earnings.

• However, as IMU contributed 1.5% of IHH’s revenue and 2.6% of the group’s PATAMI for FY21, we expect a negligible impact to FY23F normalised earnings, assuming interest savings at 4% from the cash proceeds. Hence we maintain FY22F–FY24F earnings.

• Recall that IHH earlier proposed to buy the entire stake in Ramsay Sime Darby Healthcare for an enterprise value of RM5.7bil (US$1.35bil), which could raise the group’s FY22F net gearing to 48% from 23.5%. However, the IMU proceeds will reverse the net gearing down to a more manageable 29%.

• All in, we are neutral on this development, which is part of IHH’s ongoing portfolio review and strategy to redeploy capital for higher prospective returns in healthcare delivery services.

• At this juncture, we do not view the stock’s FY22F PE of 31x as compelling although it is below its 2-year average of 36x, with an unexciting dividend yield of 2%.

Source: AmInvest Research - 8 Jun 2022