In an announcement to Bursa Malaysia, IHH proposed to divest its entire 100% stake in IMU Health Sdn Bhd (IMUH) for a cash consideration of RM1,346m at an Enterprise Value (EV) of RM1,345m. We view this latest corporate development to divest its non-core asset positively which is in line with IHH’s stated strategy of divesting non-core assets and recycling capital by deploying the proceeds to grow core healthcare delivery services business. No changes to our FY22E/FY23E earnings forecasts for now. Reiterate MP. We keep our SoP-TP unchanged at RM6.65.

Divestment of non-core IMUH. IHH Healthcare Berhad (IHH) has proposed to divest IMU Health Sdn Bhd for a total cash consideration of RM1,346m or at an EV of RM1,345m to Inbound Education Holdings Sdn Bhd. The sale comprises the following: (i) divestment of 100% stake in IMUH, and (ii) as part of the deal, IMUH will divest a teaching hospital still under construction to Columbia Asia Sdn Bhd. We view this latest corporate development to divest its non-core asset positively which is in line with IHH’s stated strategy of divesting non-core assets and recycling IHH’s capital by deploying the proceeds to grow core healthcare delivery services business.

Impact to financials. For illustration purposes, impact to financial and valuation are as follow:- (i) Based on the indicative Enterprise Value (EV) of RM1,345m, the valuation works out to EV/EBITDA of 17x on FYE Dec 2021 EBITDA of RM81.4m which is higher than the transaction where Paramount exited its education business for 16x back in 2019 and SEGI International trading at 11x, (ii) In terms of PER, the disposal PER is 25x based on FYE Dec 2021 net profit of RM54.5m while loss of earnings is estimated at 3% of our FY23E earning, and (iii) expected gain from divestment is RM902m (10 sen/share) which is expected to raise book value per share from RM2.54 to RM2.64 as at 31 Mar 2022, and (iv) net gearing is expected to improve from 17% to 11% as at 31 Mar 2022. The divestment is expected to complete in 1Q 2023.

Outlook. Going forward, the Group is optimistic of the rebound in its non-COVID business; however, it expects some short-term headwinds such as the tapering of COVID-19 related revenues, and inflationary pressure. The Group has taken pro-active initiatives to partially mitigate the effects of lower patient volumes by improving case-mix and providing COVID-19 screening services. As borders reopen and restrictions lifted, the Group is ramping up efforts to improve its core businesses by growing domestic and foreign patient load back to pre- COVID levels. 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 divestment goes through, our SoP-TP is expected to rise by 1.5%.

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

Source: Kenanga Research - 8 Jun 2022