Sime Darby; Hold;
Price Target: RM9.60; SIME MK

Sime Darby today announced that its wholly-owned subsidiary, Sime Darby Holdings Berhad (SD Holdings), has proposed to establish a joint venture (JV) with AH Holdings Health Care Pty Ltd (AHHC), a wholly-owned subsidiary of Ramsay Health Care Ltd (Ramsay), which is an Australian global hospital group operating 116 hospitals in Australia, UK, France and Indonesia.

In the proposal, SD Holdings will inject its healthcare and education business (i.e. 3 hospitals and 2 nursing schools), and AHHC will inject its Indonesian healthcare business (2 hospitals in Jakarta and 1 in Surabaya) into Sime Darby Global Healthcare Sdn Bhd (SDGH). SDGH will subsequently be renamed as Ramsay Sime Darby Health Care Sdn Bhd. SD Holdings and AHHC will each have a shareholding in SDGH of 50%.

Based on the announcement, SDGH will acquire:

(a) from SD Holdings, 100% of the shares in Sime Darby Healthcare Sdn Bhd ( SD Healthcare) for a consideration to be satisfied through the issuance of new SDGH Shares, which will result in SD Holdings having an initial ownership interest of 75.7% in SDGH, subject to adjustment; and

(b) from AHHC, 100% of the shares in Affinity Health Care Holdings Pty Ltd (AHCH) for a consideration to be satisfied through issuance of new SDGH Shares, which will result in AHHC having an initial ownership interest of 24.3% in SDGH, subject to adjustment.

Under the terms of the Shareholder Equalisation Agreement, SD Holdings will sell such number of SDGH Shares to AHHC to equalise the shareholding of SD Holdings and AHHC in SDGH. We understand that the market value of Sime Darby's assets are estimated at c.RM1.1bn; whereas the market value of Ramsay's assets are estimated at c.RM370m. SD Holdings will transfer approximately 25.7% SDGH Shares to AHHC for a total cash consideration of RM390m (on the basis that there is no adjustment to the considerations) whereby:

(a) AHHC shall pay RM187.3m to SD Holdings on Completion Date; and

(b) AHHC shall pay the remaining RM202.7m to SD Holdings over a 3-year period in accordance with the terms of the Shareholder Equalisation Agreement, set forth as follows:

• Completion date + 1 year RM45m
• Completion date + 2 years RM67.6m
• Completion date + 3 years RM90.1m

Through the sale of SDGH shares to AHHC, Sime Darby will recognise estimated RM340m (or c.5.66 sen per share) net gain from mark-to-market DCF valuation of its 3 hospitals and 2 nursing schools. If the completion date is done by 30 Jun13, then Sime Darby will recognise the gain in FY13.

As at 30 June 2012, EBIT of SD Healthcare was RM26.1m (or 0.4% of Group’s EBIT) and EBIT for PT Affinity Health Indonesia (wholly-owned subsidiary of AHCH) was RM5.1m. We understand post completion, Sime Darby will account the new JV as equity method; and will no longer consolidate the aforementioned assets.

We view the transaction positively for several reasons:

1. Sime Darby would share the capex outlay in expanding its healthcare business regionally;

2. Sime Darby would monetise its assets value and receive RM390m in cash (c.RM6.49 sen per share); which can then be employed to expand its other divisions or perhaps distributed as part of its full year dividends; and

3. To capitalise on each other's strengths in expanding the healthcare business regionally, including Malaysia, Indonesia, Vietnam and Myanmar.

Pending completion, we have not yet revised our numbers to include the RM340m gain on disposal and equity method for the JV from FY14F onwards. Our HOLD call and RM9.60 TP on the counter is maintained.

Source: HwangDBS Research - 27 Mar 2013