Investment Highlights

• We reiterate BUY on Apex Healthcare (Apex) with an unchanged fair value (FV) of RM4.21/share, based on FY23F target PE of 20x, at parity to its 5-year average. No ESGrelated adjustments based on our 3-star rating.

• Our FY23F-25F earnings are maintained pending the completion of the reduction in the effective stake of the group’s orthopaedics business to 16% from 40% currently.

•  Last Friday, Apex’s 40%-owned associate Straits Apex Group (SAG) entered into an agreement with Asian healthcarefocused private equity Quadria Capital (Quadria) to sell its entire equity stake in Straits Apex (SA) for an enterprise value (EV) of US$215mil (RM949mil), including net debt and working capital adjustments of US$25mil.

• The sale is expected to complete by 2QFY23. SAG will receive a combination of US$135mil in cash and US$80mil in the form of a 40% equity stake in a new holding company established by Quadria that directly owns 100% of SA’s equity (Exhibit 1). Hence, Apex's effective equity stake in the orthopaedics business will decrease from 40% to 16%.

• SA is a contract manufacturer of surgical grade orthopaedic devices, components, and surgical instruments in Penang. Orthopaedic components such as screws, plates, implants, intra-medullary nails, pins, and external fixators are used in the surgical treatment of musculoskeletal disorders resulting from trauma, disease, injuries or deformities.

• The purchase price of US$215mil represents a 15x EV/EBITDA multiple based on SA’s 3-year (FY20-22) average EBITDA. We consider this as reasonable compared to Apex’s FY23F EV/EBITDA of 16x.

• This also translates to a valuation of US$86mil (RM379mil) for Apex’s 40% interest in SA. Since 2013, Apex has only invested a total of RM7mil in SAG, implying a remarkable 54x return to Apex’s investment over the past decade.

• Hence, we estimate a 2QFY23 one-off disposal gain of RM310mil (3.1x FY23F core earnings), based on the NBV of RM70mil for Apex's investment in SAG as at 31 Dec 2022.

• However, Apex’s FY23F-25F core net profit (excluding the one-off profit) will decrease by 11%/15%/14% as Apex’s effective equity stake in the orthopaedics business will decrease from 40% to 16%.

• As for now, we are neutral on the effective 24% equity stake divestment, and our future view on the group will depend heavily on whether SAG is able to identify an alternative investment for the US$135mil cash proceeds that can mitigate the lower recognition of SA’s prospective earnings.

• The use of cash proceeds by SAG remains uncertain at this juncture pending further guidance from Apex’s management in the upcoming result briefing on 25 May 2023.

• Apex has been enjoying strong CAGR earnings growth of 12% over the past 20 years (Exhibit 2), anchored by an ageing population, public health education advancement and steady healthcare expenditure increase. In the near term, Apex is poised to ride on the prevalence of Covid-19, moderating prices of active pharmaceutical ingredients and the return of patient visits to hospitals.

• Apex also exhibited resilience and flexibility during the Covid-era via rapid identification and supply of in-demand products. Additionally, Apex’s net cash position of RM158mil represents a significant 8% of its market cap.

• The stock currently trades at a compelling FY23F PE of 19x, vs its 3-year peak of over 25x, while offering a decent dividend yield of 2%.

• On a positive note, Apex proposed a 1-for-2 bonus issue, which could increase trading liquidity and improve the affordability of the stock, hence potentially broadening its shareholder base and mitigate the valuation discount.

Source: AmInvest Research - 2 May 2023