INVESTMENT HIGHLIGHTS

• Proposed acquisition of land and building in Manjung, Perak

• Acquisition to reduce operating costs in the long run

• Little to no impact on gearing

• Earnings forecast remains unchanged

• Maintain NEUTRAL with TP of RM6.58 per share Proposed acquisition of land and building in Manjung, Perak.

IHH Healthcare via its wholly-owned subsidiary Pantai Medical Centre Sdn Bhd (PMCSB) has entered into a sales and purchase agreement (SPA) with YNH Hospitality Sdn Bhd (YNHSB) and Kar Sin Sdn Bhd (KSB), a wholly-owned subsidiary of YNH Property Bhd on 26 January 2017. It is for the proposed acquisition of a parcel of freehold land together with a five-storey purpose-built private hospital with 384 surface carparks – formally known as Pantai Hospital Manjung - located in district of Manjung, in the state of Perak Darul Ridzuan. The proposed acquisition is for a total consideration of RM63m and is expected to be completed within three months.

Acquisition to reduce operating costs in the long run. PMCSB is currently leasing the land and property from KSB since 2014. The acquisition is expected to result in cost savings for IHH in the long run. It will also enable IHH to benefit from the appreciation of the property. KSB is currently still the registered owner of the land and property despite having sold the property to YNHSB back in March 2015. This is due to the mutual agreement between the two parties which results in KSB being the registered owner of the property while YNHSB is the beneficial owner of the property.

Acquisition price. As at 31 Dec 2015, the net book value of the property is RM51.17m. As such, IHH is planning to purchase it at a premium of +23.5%. However, we believe that the potential future savings in operations and future bed expansions will more than outweigh the premium paid.

No impact on gearing. IHH intends to fund the acquisition either via borrowings and/or internally generated fund. Assuming that the acquisition is fully funded by borrowings, IHH’s gearing ratio will remain at 0.21x as the acquisition is relatively small.

That said, we do note that IHH’s cash position as of 3Q16 amounts to RM2.1b which is more than enough to fund the entire acquisition without external borrowings. We opine that IHH will most likely fund the acquisition via internally generated funds to make way for bigger acquisitions locally or abroad that will require heavy external borrowings.

Earnings forecast. We are making no changes to our earnings forecasts. The key risks to our earnings are: (i) volatility in the currency market; (ii) lower than expected inpatient admissions and revenue per patient and; (iii) increasing cost of operations in its key home markets.

Maintain NEUTRAL. We are maintaining our NEUTRAL recommendation on IHH with a DCF-based TP of RM6.58 per share (TG: 4.5%, WACC: 9.0%). We think that despite the resilient demand and growth for healthcare services across all its home markets, we remain wary of 2017 as challenges persist. This is in terms of the continuous increase in: (i) operating costs; (ii) cost of living in its home markets as well as; (iii) inflation in personnel wages. This is coupled with the volatile movement of the currency exchange which might pose a risk of exchange loss on its borrowings. That said, we continue to be long term positive on IHH’s fundamentals as its robust balance sheet with a gearing ratio of 0.21x and cash position of RM2.1b will continue to ensure the prospects of the company remains intact

Source: MIDF Research - 27 Jan 2017