IHH Healthcare

• Its Fair Price;
• Its Past;
• Utilization Of IPO Proceeds;
• Its Growth;
• Its Shareholders;
• Its Valuations;

Its Fair Price: 2.98(PBB), 3.00 (JF Apex), 3.33 (TA)


Its Past '


It is sitting on a profit of rm5.5 billion as group goes public.Khazanah paid almost rm8 billion take Parkway Holdings Ltd private.  The bulkof the rm5.5 billion comes in the form of Khazanah's 47% stake or 3.85billion shares in IHH Healthcare Bhd post listing that comes to rm4.9 billion.Its average cost per share is rm1.58 while the IHH IPO price is rm2.85 pershare. The balance of the gain comes from Khazanah's divestment of aportion of is stake to Mitsui Co Ltd of Japan in Feb 2011 and the sale of 60%stake in Pantai Holdings to IHH.

Khazanah's outlay for taking Parkway private was close to rm7.5billion. Now (July 2012) it is sitting on a gain of rm5.5 billion, part ofwhich is already realized.

Khazanah took Parkway off the market in 2010 after paying S$3.5 billion(rm8.6 billion) for the 76.1% stake it did not own. It fought a tough batteragainst Fortis Healthcare group in Singapore .

Khazanah took out the concession assets in Pantai and injected theremaining 60% stake into IHH. It also injected 100% of IMU and 13% in ApolloHospital Group of Indiainto IHH.

In Feb 2011, Khazanah divested 30% stake of IHH to Japan Mitsui Co Ltd.Mitsui paid rm3.3 billion for its stake. IHH's shares were valued at rm2in the deal. Out of the proceeds of mr3.3 billion, rm1.3 billion went toKhazanah, which made a profit of more than rm250 million from the deal.

IHH now (July 2012) includes the company's acquisition of a 75%stake in Acibadem for rm3.7 billion. Acbadem is Turkey's largest private healthcare provider, with a network of 14 hospitalsacross Turkey and Macedonia. Abraaj Capital, which sold the stake in Acibadem to IHH, was provided a 7.02%stake in the latter.


Utilization Of IPO Proceeds '

IHH is offering 52 million shares or 0.65% of the enlarged sharecapital to Singaporeans at S$1.18 per share and 161.14 million shares or 2% tothe Malaysian public.

IHH's IPO will generate some rm5.13 billion in cash. The groupwill allocate a lion's share of the proceeds to reduce its whopping debtsin order to strengthen its balance sheet for future acquisition.

With the cash in hand, IHH will be able to slash its net debt to rm1.38billion from rm6.04 billion which will reduce its gearing to 2.8 times fromcurrent (July 2012) 7.8 times.

Its total debtstood at around $2.4 billion as of the end of March 2012.

IHH had chosen not to commit to a dividend policy although it isgenerating cash flow of rm1 billion a year. However the group will paydividends when appropriate.

After netting off the cost of IPO, IHH will receive about rm4.94billion cash from the listing exercise, of which 90.9% will be used to pay offdebts. Most of the proceeds will pay off a rm3.71 billion debt for financingthe privatization of the Parkway group in 2010.

About 75% of its planned capex of rm6.9 billion has been paid for theperiod between 2010 to 2015.



Its Growth '

Parkway is one of Asia's largest private healthcare providers andoperates in Singapore, Malaysia, China,Hong Kong, India,Vietnam and Brunei.It earns more than half of its revenue in Singapore, where it is the largestprivate hospital provider with 43.9% market share.

CurrentlyIHH's Singaporeoperations have one of the highest margins and contribute about 28% to grouprevenue.

In Malaysia,Parkway is the second largest private healthcare provider with a 15.1% marketshare. Parkway's expansion efforts will be focused in Malaysia, where it intends to spend rm454million in the next few years (2012 & Beyond) to upgrade several Pantai andGleaneagles hospitals in Penang, KL and the Klang Valley

IHH aims to add 3300 new beds in the next five years to the 4900presently (July 2012). Its core healthcare operations and investments arelocated in Malaysia, Singapore and Turkey. This is in addition toother operations in China, India , HK, Bruneiand Macedonia.The company diversified geographically only in recent years, as it was earningsall its revenue from Singaporein 2009.

IHHis vision is to be a pan Asian player in the healthcare arena. Infact, this has panned out as planned with the acquisition of Acibedem inaddition to IHH's foothold in India via its 11.2% stake in ApolloHospitals Enterprise.

IHH will experience organic growth with the new hospitals it isbuilding such as its Mount Elizabeth Novena hospital complex in Singapore.The first investment to roll out is the MontElizabeth NovenaHospital in Singapore in July 2012. Thehospital cost IHH rm4.5 billion to build and more than 90% has been paid for.

Nevertheless, IHH is on the lookout for hospital management agreementswithin the region. IHH has HMAs in China,India, Vietnam and the Middle East.

The HMA business model allows IHH to carry on its core activity withouttaking on additional investment risks, and is useful in markets which the groupis interested in but may not want to commit to right way. This is due to thehigh investments and risks involved.

IHH sees HAMs asone of the drivers of future growth for the group.

Key markets in India,China, Middle East and Vietnamare where they are looking to move the next step for the next phase of growth.



Its Shareholders '

Khazanah has decided to free the majority of the blue chips cornerstoneinvestors in IHH's IPO from any trading restrictions. Only investors withallocations of more than 50 million shares will be bound by a six month lock upclause.

Only seven of the cornerstone investors including the EPF and the KIAwhich collectively account for 900 million shares will not be able to selltheir shares in the first six months after listing set for the end of July2012.

 The EPF and KIA were given the lion's share of the cornerstoneallotments with 8.95% and 6.71% shares on issue respectively.

Khazanah currently has a 62.14% stake in the group. The IPO will diluteKhazanah's stake to 47.78% but create unrealized gains of rm4.90 billionbased on its average cost of rm1.58 per share.

Khazanah will not be cashing in on IHH anytime soon. It makes upapproximately 10% of Khazanah's portfolio and will be one of the investment'sagency's core businesses.

IHH next biggest shareholder is Mitsui & Co Ltd, which will have adiluted 20.48% stake post IPO.

IHH has reserved 62 percent of its IPO for cornerstone investors whomust hold the shares for a minimum 180 days. This includes the Government ofSingapore Investment Corp, Temasek Holdings Pte's Fullerton FundManagement Co, Malaysian billionaire T. Ananda Krishnan's Usaha Tegas SdnBhd, Kuwait Investment Authority, asset manager Blackrock.

The 22 cornerstone investors, who also include International FinanceCorp, the private investment arm of the World Bank, will buy 1.39 billion ofthe 2.23 billion shares on offer - just over a quarter of the company - thebiggest take-up by such investors of any recent major offering in the region.Up to 1.8 billion new shares in the IPO are on offer, while Abraaj Capital willsell 434.7 million shares in the dual Kuala Lumpurand Singaporelisting.

Eastspring Investments, the asset management arm which is owned byPrudential PLC, and Malaysian pension funds have already committed to invest inthe offering.

Roughly half of the remaining 720 million shares on offer will be takenup by the MITI. The rest will be offered to retail investors as well asemployees and healthcare workers.

Of the 2.23 billion shares up for offer, about 400 million will be soldby existing shareholders while the rest will be new issuances.

Khazanah is the largest shareholder with a 62% stake while Japan's Mitsui & Co owns a 26.6% stake. Dubai based Abraaj Capital has7.1% stake and Turkish hospital group Acibadem's chief Mehmet AliAydinlar owns 4.2% stake.



Its Valuations ' dated July2012

Its recent acquisitions may weigh down the group's earnings withdepreciation and amortization charges. Khazanah, its major shareholder paid apremium for its healthcare assets, as high as 26 to 30 times PER. Khazanah wasbelieved to have paid almost 40 times PER for the Singapore healthcare group. Parkwayafter bidding against India'sFortis Group.

Khazanah's healthcare investment arm, IHH is set to come to market at one of thehighest PER among companies making their debut on BursaMalaysia. IHH already has 22 cornerstone investors lined up, a list of comprising a mixof local and foreign, institutional and sovereign investors.

IHH's cornerstone offering of 1.3 billion shares comprises 62.09%of the IPO shares offerd and 17.22% of the enlarged shares capital after thelisting.

Based on thecornerstone offer price of rm2.85, IHH is priced at 93 times pro forma FY2011earnings per share of 3.05 sen. In comparison, the median PERs for healthcareoperators in the Asia Pacific's emergingmarkets is only 15.3 times. IHH also looks expensive compared with healthcareservice providers operating in similar markets. The median PER for five ofthese players is 33.2 times (historical) and 26.1 times (forward).

No forecast wasprovided in IHH's draft prospectus released but based on pro forma EPS of2.04 sen for the quarter ended March 31 2012 the offer price of rm2.85translates to a PER of 34.9 times based on annualized EPS of 8.16 sen.

IHH reported proforma earnings of RM165 million for the 1QFY2012 ended March 31 with anannualized earnings per share of 8.16 sen and a retail offer price of rm2.85,the stock is being valued at 35 times earnings. The valuation appears high butit can be justified because of the capex that will increase IHH's 4900beds by 63%.

However, PER maynot be the most suitable method to value the stock.

Healthcare providers are a peculiar breed, with some having aggressivedepreciation policies for their hospital equipment and other fixed assets. IHHwill be adding more than 3000 beds with the new hospitals coming onstream.

IHH should not be compared with some of the regional healthcare playersdue to differing depreciation policies. Furthermore IHH offers investors anopportunity to tap into markets where tourism healthcare is set to grow, namelyMalaysia and Turkey, via its indirect 60% owned Acibadem Holdings AS.

More than 90% of the RM4.9 billion in net proceeds raised from the IPOwill go paying off the capex to date (July 2012) that has been mostly funded bydebt. This leave IHH with rm1.6 billion in capex for some2200 beds to be addedby 2015.

IHH will have no problem funding the remaining capex with internallygenerated funds backed by a strong cash flow of about rm1 billion annually.

The company hasalso declared that it would not commit itself to a dividend policy.

Khazanah'sacquisition of Parkway Holdings in 2010 resulted in high levels of intangibleson IHH's books. Due to largely to its past mergers and acquisitions,goodwill and other intangible assets represent a substantial portion of assets.

The group'sgoodwill and other intangible were approximately rm11.6 billion as at March 31,2012 on a historical combined basis, representing approximately 49.8% of itstotal assets and 93.6% of its consolidated total equity.

Goodwill arisingfrom mergers and acquisitions account for most of the group's intangiblesand are worth some rm8.5 billion, half of which can be attributed to theParkway Group. In total, Parkway's intangibles are worth some rm6 billionin IHH's books.

IHH has been growing its global footprint, going on an acquisitionspree to capture expanding demand for healthcare services. However, almost ofthe funds raised will be allocated to paying off debts used to acquire itsprized healthcare assets in the last two years (2010-2011).

IHH plans to use90.9% of the rm6.37 billion raised from the IPO to pay off debts within 12months. As at March 31, 2012 IHH had rm7.63 billion in total borrowings and netgearing of 0.49 times.

The high debt levels were pinned on the group's aggressiveexpansion in the past two years (2010-2011).

The group noted that a lower gearing would give it the flexibility toexpand operations locally or overseas and to raise financing as and whenattractive opportunities arise.

In fact, IHH is not committed to a dividend policy to pay out a minimumamount of its earnings.