Highlights

WSJ reported that IHH is considering a bid for Australia’s Healthscope, put on the block by private-equity owners TPG Capital and Carlyle Group LP in a deal that could be worth USD5bn (RM16.4bn). Bids are due in April.

TPG and Carlyle are also considering an IPO of the hospital operator, or they could sell Healthscope’s property and hospital divisions separately.

Healthscope’s management is talking to potential cornerstone investors in Asia, Middle East and the US for a listing that would value the company at USD5bn, including USD1bn debt.

The private-equity firms would likely to hold on to at least 25% of the company if they pursue listing. Alternatively, they are also considering selling just a portion of their stake in Healthscope to sovereign-wealth funds.

TPG and Carlyle bought Healthscope for about USD1.7bn in 2010.

Healthscope is one of the largest hospital and pathology companies in Australia. It has 33 hospitals, 4 mental-health hospitals and 4 rehabilitation facilities. Healthscope also operates pathology businesses in New Zealand, Malaysia, Singapore and Vietnam.

Financial Impact

Without the information of IHH’ interest and exactly how the deal is structured, the financial impact is difficult to be assessed.

With gearing of 0.12x and net debt to EBITDA ratio of 1.39 by end of FY13, IHH is still comfortable to acquire a stake or becoming the cornerstone of the IPO.

Comment

If materialize, this would enable IHH to penetrate into new mature markets including Australia and New Zealand with relatively higher average revenue per inpatient admission.

Further synergy in terms of economies of scale, bulk purchase, cross services referral and pooling of specialists.

Catalysts

Global population growth, ageing demographics, more affluent community, proliferation of medical tourism, overwhelming healthcare demand.

Risks

Regulatory / competitive / FOREX risks, increase in staff cost and unable to unlock the synergies of the enlarged entity.

Forecasts

Maintained.

Rating

HOLD, TP: RM3.72

Positives – strong brand name, booming of medical tourism, high demand for quality healthcare services, continuous expansions and complemented by education arm.

Negatives – high staff cost and retention of reputational medical practitioners.

Valuation

Maintain HOLD rating on the stock with unchanged fair value of RM3.72 (see Figure #4).

Source: Hong Leong Investment Bank Research- 11 Mar 2014