In an announcement to Bursa Malaysia, IHH is acquiring Prince Court Medical Centre Sdn Bhd for cash consideration of RM1.02bn which works out to an implied EV/EBITDA of 23.2x which is at the higher-end of peer KPJ’s 14.7x valuation. The acquisition is expected to contribute less than 1% to our FY20 earnings forecast. No changes to our FY19E/FY20E earnings forecasts for now. Reiterate UP. TP is RM4.85 based on SoP valuation.

Acquiring Prince Court for RM1.02bn, works out to 23.2x EV/EBITDA and 39.2x PER. In an announcement to Bursa Malaysia, IHH has proposed to acquire Prince Court Medical Centre Sdn Bhd (Prince Court) for a cash consideration of RM1.02bn from Pulau Memutik Ventures Sdn Bhd, wholly-owned subsidiary of Khazanah Nasional Berhad. Based on the offer price of RM1.02bn, the deal works out to EV/EBITDA of 23.2x based on FY18 EBITDA of RM44m. Based on Prince Court’s normalised net profit of RM26m, the deal works out to 39.2x PER. The acquisition appears expensive compared to KPJ’s Healthcare EV/EBITDA and PER of 14.7x and 21x, respectively. However, Prince Court is one of the key strategic private hospitals in the Klang Valley which is expected to enable IHH to leverage on its wide network of hospitals to deliver potential synergies and offerings. Prince Court Medical Centre Sdn Bhd operates 277 licensed beds, offering a wide range of medical, surgical and hospital services including cancer, gastrointestinal diseases, interventional cardiology, invitro fertilisation, nephrology, occupational health, orthopaedic and rehabilitation medicine. The acquisition is expected to be completed by 1Q 2020.

Impact to financials. For illustrative purposes; (i) the acquisition is only expected to contribute <1% to IHH’s group earnings based on Prince Court’s normalised FY18 net profit of RM26m, and (ii) the acquisition will only put a small dent to IHH’s net gearing of 0.2x as at 30 June 2019.

Outlook. The group has pared down US$250m equivalent of its nonLira debt for Acibadem in April as part of on-going plan to reduce the exposure to Turkish Lira’s volatility. The remaining balance of US$300m is expected to be pared down sometime in 2020. We are concerned over issues at Fortis, including an auditor’s qualified audit report in FY18, risk of more provisions, lapses in internal controls, which led to the regulatory probing, which could well mean execution risk. Looking ahead, over the medium term, IHH is expected to face tough operating conditions on the back of: (i) the uncertain Turkish Lira which has depreciated significantly against USD, Euro and MYR with continued volatility, and (ii) execution risk at Fortis as well as uncertainty over its timeline in terms of a turnaround to profitability.

Maintain UNDERPERFORM. TP is RM4.85 based on SoP valuation, implying 38x FY20E EPS (-1.0SD below 5-year historical forward mean).

Key upside risk to our call: faster-than-expected ramp up in new hospitals.

Source: Kenanga Research - 18 Sept 2019