Apex Healthcare (ApexH)'s associate, Straits Apex Group (SAG), has entered into an agreement to sell its entire stake in Straits Apex SB (SA) to Quadria Capital, a healthcare-focused private equity firm in Asia. After the proposed divestment, SAG will hold a 40% equity interest in SA, with Quadria holding the remaining 60%. ApexH will in turn hold a 16% effective equity interest via its 40% stake in SAG. Hence, ApexH’s share of SA profit is expected to reduce from 40% to 16% after the completion of this proposed divestment. Based on our preliminary estimates, our FY23-25F earnings would reduce by about 18%. The proposed divestment is expected to take place in 2QFY23. At this juncture, we maintain our earnings forecasts pending the finalisation of this proposed divestment. We maintain our Neutral call on ApexH, with an unchanged TP of RM3.83 based on a 20x 1-year forward PER.
- Background of SAG. SAG is a leading ASEAN contract manufacturer of orthopaedics devices for global multinational companies through its two 100% owned manufacturing subsidiaries under SA Group, Straits Orthopaedics SB and ABio Orthopaedics SB. SAG’s main production facilities are located in Prai Industrial Estate, which include a clean room and packaging facility in Telok Kumbar, Penang and 2 manufacturing facilities at Penang Science Park. SA Group has been contributing to the share of associated profit to ApexH (through 40% SAG) for the past 3 financial years from FY20-FY22, which accounts to 15%/12%/29% of the full year net profit.
- Details of proposed divestment. The proposed divestment enable SAG to participate in future growth of SA Group with Quadria as its partner. Upon completion of divestment, SAG will own 40% effective equity interest in SA, while the remaining 60% will be owned by Quadria. ApexH will in turn hold a 16% effective equity interest via its 40% stake in SAG (refer Figure 1). The initial investment of ApexH in SAG was RM7m in 2013. With an enterprise value of RM424.4m and assuming a RM44m of negative net debt and working capital, the total carrying amount after proposed divestment is estimated at RM310m (refer Table 1).
- Potential reduction in share of profit. Upon divestment, the recognition for share of profit from SA will be reduced from an initial 40% to 16%, translating into an estimated ~18% reduction in our FY23-25F net profit forecasts. However, note that this is our preliminary estimates as we have yet to factor in the potential income arising from the lease of the Batu Kawan production facilities that are currently under construction but expected to complete by 4QFY23 (operational by 1QFY24). This should provide some mitigating effect from the proposed divestment of SA.
Source: PublicInvest Research - 2 May 2023