IHH has entered into a definitive agreement with a consortium of investors, for the sale of IMU, at an enterprise value of RM1.345bn. The disposal of IMU did not come entirely as a surprise, as IHH has been constantly reviewing its portfolio to focus on its core hospital operations. We are positive on this development, as the enterprise value of RM1.345bn implies an EV/EBITDA multiple of 16.6x, which is at an 80% premium to SEGi’s EV/EBITDA of 9.21x. This disposal is also expected to generate a disposal gain of c.RM902m. Post disposal, we estimate a loss of income of c.3% for FY23-24f and gearing ratio to decline to 0.16x (from 0.21x in 1QFY22). Reiterate BUY on IHH, with an unchanged SOP-derived TP of RM7.75 as we believe that this move will allow IHH to unlock the value in its education arm and redeploy its resources to focus on its hospital operations.

NEWSBREAK

IHH has entered into a definitive agreement with a consortium of investors, for the sale of its medical education arm, International Medical University (IMU), for an enterprise value of RM1.345bn. The consortium of investors is led by The Rise Fund (founded by TPG) and Hong Leong Group. Note that the sale also includes the disposal of a hospital owned by IMU, which is currently under construction and targeted to complete by end-FY22.

Total cash consideration for the disposal will be c.RM1.346bn (subject to adjustments as set out in the share sale agreements) and the proceeds will be mainly be used for corporate purposes (i.e. debt repayment, capex, M&A, investments and working capital). IHH is also expected to pocket a gain of c.RM902m from this disposal (carrying amount of IMU as at 31 Dec 2021: RM444m), which will be treated as one off due to its non-recurring nature. The proposed disposal is targeted to complete in 1Q23.

HLIB’s VIEW

The disposal of IMU did not come entirely as a surprise, as IHH has been constantly reviewing its portfolio to focus only on long-term core assets, which is essentially their hospital-related operations. We are positive on this development, as the enterprise value of RM1.345bn implies an EV/EBITDA multiple of 16.6x (based on IMU’s adjusted EBITDA of RM81.4m in FY21), which is at an 80% premium to SEGi’s EV/EBITDA of 9.2x. This move would also allow IHH to monetize its long-term investment in IMU and redeploy its capital to further strengthen its core hospital operations.

Post disposal, IHH will cease to consolidate the results of IMU; IMU accounts for c.1.4% of our FY22-24f revenue forecasts and we note that the segment has been providing a consistent profit contribution of c.RM55m to the Group in the recent years (with the exception of FY20). Hence, we estimate a loss of income of c.3% for FY23- 24f, once the deal is completed. Assuming all the cash proceeds received (RM1.346bn) are used to repay debts, gearing ratio will also decline from 0.21x in 1QFY22, to 0.16x.

Forecasts. Keeping our forecasts unchanged for now.

Maintain BUY, TP: RM7.75. We reiterate our BUY call on IHH, with an unchanged SOP-derived TP of RM7.75 as we believe that this move will allow IHH to unlock the value in its education arm and redeploy its resources to focus on its hospital operations.

Source: Hong Leong Investment Bank Research - 8 Jun 2022