News

According to an announcement in Bursa Malaysia, IHH Healthcare has proposed two acquisitions for a total consideration of RM437.7m (EUR76m) (cash consideration is RM334.4m) namely: (i) proposal to acquire Tokudo Group via 59.6%-owned Acibadem Saglik Hizmetleri for RM286.1m (EUR65m), and (ii) proposal to acquire 76.5% stake in City Clinic Group via 30%-owned Acibadem Sistina Skopje for RM48.3m (EUR10.9m) (from shareholders who are cashing out, with an allotment of shares equivalent to EUR23.4m (RM102.9m) or 23.5% in the SPV to shareholders who will take part in the merged entity). Both entities operate hospitals in Bulgaria, Sofia. IHH's effective stakes in City Clinic is 41.2%.

City Clinic, founded in 2010, is a leading high-quality integrated healthcare provider in Bulgaria, operating in Sofia, Varna and Burgas. It operates three hospitals and three outpatient centres. Following the opening of its new cancer centre in 2015, City Clinic will dominate the market for both cardiovascular and cancer care in the country.

Tokuda Group is the largest private hospital operator in Bulgaria, running a 52,000 square metre state-of-art tertiary hospital with 550 beds, an outpatient medical centre, clinical research centre, pharmacy and a hospice, all located at the same site in Sofia. The hospital was opened in 2006 as the first private hospital owned by a foreign investor in Bulgaria with 100% Japanese investment. It operates as a multidisciplinary service with over 30 medical departments and 22 operating theaters.

Simultaneously, both entities will be merged and operate under the brad name of Acibadem City Clinic.

The transaction boosts Acibadem's beds globally to more than 3,500 across 22 hospitals in 3 countries.

The deal is expected to be completed in three months time.

Comments

This latest corporate development is not totally unexpected as it was highlighted in the media in Mar 2016. However, this latest news underlines IHH’s committed intention into expanding regionally, which is positive. We understand that Acibadem can capture an estimated 40- 45% market share of the Bulgarian healthcare market in cadiology and oncology of which IHH is well-known for.

We understand that Tokudo which has been operating for about 9 years is EBITDA positive with margin at mid teens. City Clinic is EBITDA positive operating at high single-digit margin, but we are unsure of its profitability.

This acquisition would only put a small dent to IHH’s net gearing, which stood at 21% as at 31 Dec 2015.

Outlook

Growth driver in the next five years will come from the following:- (i) In Malaysia, PPL is currently undertaking expansion projects in four hospitals, namely Pantai Hospital Ayer Keroh (160 beds, completion in end 2017), Pantai Hospital Klang (80 beds), Pantai Kuala Lumpur (120 beds). Greenfield projects meanwhile, namely Gleneagles Medini (phase 1b, 160 medical suites), and (ii) in Turkey, Acibadem is currently undertaking expansion in Acibadem Sistina Skopje (81 beds) and Acibadem Maslak (200 beds, target completion 2017). The greenfield projects are Acibadem Altunizade (325 beds, target completion 2017) and Acibadem Kartal (120 beds, target completion 2018). Over at the international side, Chengdu and Hong Kong are expected to commence in 2H17.

Forecast

No changes to our FY16E and FY17E numbers for now.

Rating & Valuation

Maintain UNDERPERFORM. We roll-forward our valuation from FY16E to FY17E. Correspondingly, our target price is raised from RM5.00 to RM5.59 based on SoP. The stock is currently trading at PERs of 56x for FY16E and 50x for FY17E, which appear rich as compared to its average net profit growth of 10.5% p.a. over FY16E and FY17E.

Risksto Our Call

Faster-than-expected expansion in its greenfield and brownfield projects.

Source: Kenanga Research - 22 Apr 2016