RHB predicts Sime Darby Bhd healthcare unit IPO revival

KUALA LUMPUR (Sept 12): RHB Investment Bank Bhd said on Monday (Sept 12) it thinks diversified group Sime Darby Bhd will continue to explore all options including an initial public offering (IPO) for its 50%-owned associate Ramsay Sime Darby Health Care Sdn Bhd (RSDH) following the termination of discussions on IHH Healthcare Bhd's proposal to buy 100% of RSDH from its owners.

Ramsay Health Care Ltd owns the remaining 50% stake in hospital operator RSDH, according to RHB analyst Jim Lim Khai Xhiang.

"We (RHB) gathered that the discussions failed mainly because IHH could not come to an agreement on the valuations and terms laid out by Sime Darby and Ramsay (RSDH’s 50:50 owners).

"While the outcome is disappointing, we understand that Sime Darby is in no rush to sell RSDH, a non-core business," Lim wrote in a note.

He said that on March 22, IHH proposed to acquire 100% of RSDH from Sime Darby and Ramsay for an enterprise value (EV) of RM5.67 billion, on a cash and debt-free basis.

The deal implied an EV to earnings before interest, taxes, depreciation, and amortisation (EBITDA) ratio of 22 times, in line with recent healthcare transactions valued at between 20 times and 22 times.

"We estimated that Sime Darby could have received RM2.6 billion from the divestment, which we believe would have been used to pay a special dividend and reinvested into its core motor and industrial divisions, by acquiring adjacent and complementary assets," he said.

Following Sime Darby and IHH's separate Bursa Malaysia filings on Friday (Sept 9) on the termination of discussions on IHH's proposal to buy RSDH, Lim said on Monday that RHB made no changes to its Sime Darby earnings forecasts although RHB lowered its Sime Darby share target price (TP) to RM2.55 from RM2.75.

RHB maintained its "buy" call for Sime Darby shares.

Looking back, there had been news reports on Sime Darby's planned IPO for RSDH although the proposal was put on hold as Sime Darby was looking at various opportunities to grow its healthcare business.

However, Friday's news on the termination of discussions on IHH's proposal to buy RSDH had again generated investors' and analysts' anticipation that Sime Darby may revive its RSDH IPO plan.

At the time of writing on Monday, Sime Darby had not issued any statement in response to such speculation.

Meanwhile, CGS-CIMB Securities Sdn Bhd analyst Tay Wee Kuang wrote in a note on Monday that RSDH’s portfolio of seven hospitals comprising four in Malaysia and three in Indonesia would have added more than 1,500 hospital beds to IHH’s end-2021 bed count of 11,418 beds across key operating markets Malaysia, Singapore, India, Turkey and Europe.

Buying RSDH will also give IHH access to a new market in Indonesia, according to Tay.

"We do not foresee any downside risk to IHH’s earnings with the deal falling through as we have not included contribution from the potential deal in our earnings forecasts," said the analyst, who maintained CGS-CIMB's "add" call for IHH shares with an unchanged TP of RM8.07.

On Monday, IHH's share price closed up four sen or 0.65% at RM6.21 while Sime Darby ended unchanged at RM2.23.

Sime Darby's diversified businesses include car dealerships and heavy equipment distribution, according to the group's website.