IHH proposed to acquire of Prince Court Medical Centre (PCMC) from Khazanah Nasional Bhd for RM1.02bn. PCMC is located in the Golden Triangle of KL, operating 277 beds with occupancy of 60%. The acquisition is expected to be completed by 1QFY20. We are not over the moon on the acquisition as we feel the acquisition price is on the high side for an asset that is not scalable. We maintain forecast pending acquisition completion. We reiterate HOLD call and TP of RM6.02.

NEWSBREAK

IHH announced the proposed acquisition of Prince Court Medical Centre (PCMC) from Khazanah Nasional Bhd, for a cash consideration of RM1.02bn. Recall that back in 2018 Petronas sold the hospital to Khazanah for an undisclosed sum and IHH was roped in to turn the hospital around as it has been loss making previously. IHH was given a right of first refusal to acquire Prince Court Medical Centre during a pre agreed period and have done so as it seems.

PCMC, a private medical hospital located in the “Golden Triangle” area of KL, operates 277 beds with occupancy currently at 60%. The proposed acquisition is expected to be completed by 1QFY20.

HLIB’s VIEW

Valuations. We are not exactly positive on the acquisition. The acquisition price of RM1.02bn implies an EV/EBITDA of 21.9x; which we feel is rather on the high side for an asset that is not scalable. Note that Mitsui recently acquired 16% in IHH at 23.4x, whilst IHH acquired Fortis at c.24x. We feel that the valuation reflects mostly the price of land in the golden triangle area. Note in FY18 PCMC recorded an EBITDA of c.RM44.0m (EBITDA margin of 16.9% vs. IHH 22.5% and KPJ 14.5%) which amounts to 2.3% of our FY19 PAT forecasts.

IHH is not a developer. We feel the land price of RM3,903.2 psf works out to be fair being located in KL’s “Golden Triangle”. Back in April 2018, SOCSO acquired an 81,457.2 sqft of land from MRCB in the prime location of Jalan Kia Peng in Kuala Lumpur for RM323m, which makes it to RM3,965.2 psf.

Gearing. IHH intends to fund the proposed acquisition via a combination of internally generated funds and bank borrowings; however the proportions have yet to be finalised at this juncture. Assuming it will be funded purely by cash, net gearing ratio is expected to increase slightly to 18.1% post acquisition (from 14.6% 2QFY19).

Forecast. We maintain our forecasts, pending completion of the acquisition. We expect minimal contributions to our forward earnings given that in FY18 PCMC’s profitability amounts to c. 2.3% of our FY19 PAT estimates.

Maintain HOLD, TP: RM6.02. Maintain HOLD and TP of RM6.02. Our TP implies FY19-20 EV/EBITDA of 19.3x-17.2x. Whilst we like IHH for its exposure to key gateway markets and astute management; earnings delivery in FY19-20 will be highly dependent on the pace of them improving their increased exposures to India and Turkey.

Source: Hong Leong Investment Bank Research - 18 Sept 2019