In an announcement to Bursa Malaysia, IHH has submitted a non-binding indicative proposal to buy the entire 100% of Ramsay Sime Darby Health Care Sdn Bhd for an indicative EV of RM5.67b. We view this latest corporate development positively. The EV/EBITDA valuation works out to 25x which is lower than a recent transaction where GIC Private Limited paid 31.3x for Sunway Healthcare. No changes to our FY22E/FY23E earnings forecasts for now. Reiterate MP. We keep our SoP-TP unchanged at RM6.65.

Non-binding indicative proposal to buy 100% stake in Ramsay Sime Darby. IHH Healthcare Berhad (IHH) confirmed that a confidential, conditional, non-binding, indicative proposal has been submitted to Ramsay and Sime Darby Holdings Berhad (SDH) for IHH to acquire 100% of Ramsay and SDH’s 50:50 joint-venture company known as Ramsay Sime Darby Health Care Sdn Bhd (Ramsay Sime Darby). We are positive on this latest corporate development by IHH since Ramsay Sime Darby have a stable of 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. Under the proposal, the conditional indicative enterprise value for Ramsay Sime Darby is RM5.67b (US$1.35b) on a cash free, debt free basis. For illustration purposes, impact to financial and valuation are as follow:- (i) Based on the indicative Enterprise Value (EV) of RM5.67b, the valuation works out to EV/EBITDA of 25x on FYE Jun 2021 EBITDA of RM226m which is lower than the recent transaction where GIC Private Limited paid for a stake in Sunway Healthcare at 31.3x; (ii) Ramsay Sime Darby’s FYE Jun 2021 profit is RM30m which has minimal impact to our FY22E earning; and (iii) the acquisition is expected to raise net gearing from 17% to 42% as at 31 December 2021. Ramsay and SDH have agreed to a period of exclusivity to allow IHH to conduct due diligence and negotiate a sale and purchase agreement. The discussions between IHH, Ramsay, and SDH are preliminary and no agreement has been reached yet.

Ramsay Sime Darby operates in three countries. The group operates four hospitals in the Klang Valley, three in Indonesia and one in Hong Kong. Its flagship hospital is Subang Jaya Medical Centre (SJMC), Ara Damansara Medical Centre, Parkcity Medical Centre at Desa Park City, and Manipal Hospital in Klang. The three hospitals in Indonesia are RS Premier Bintaro, RS Premier Jatinegara, RS Premier Surabaya and The Central Surgery, Hong Kong.

Outlook. Although patient volume is impacted by the resurgence of COVID-19 cases across the globe and various movement restrictions, the Group’s diversified earnings base across 10 markets provides resilience as key markets are at different phases of the COVID-19 pandemic. The Group has taken pro-active initiatives to partially mitigate the effects of lower patient volumes by improving case-mix and by providing COVID-19 screening services. We highlight that foreign patient revenues at the Group’s hospitals in Turkey have exceeded pre COVID-19 levels since 4QFY20 after Turkey reopened its borders on June 2020. In India, the group will continue to drive cost savings and ramp up productivity and increase bed occupancy ratio - currently averaging at 60%.

Maintain MP. We keep our FY22E/FY23E earnings unchanged for now. Our SoP-TP is RM6.65. Based on our back of envelope calculation, if the acquisition goes through, our SoP-TP is expected to rise by 3-4%.

Key risk to our call is slower-than-expected recovery from the pandemic

Source: Kenanga Research - 23 Mar 2022