KEY INVESTMENT HIGHLIGHTS

• Acquiring the entire equity stake in Prince Court Medical Centre for a cash consideration of RM1.0b

• The hospital operates 277-licensed bed and is regarded as a tertiary hospital, tier-1 private hospital

• It registered FY18 revenue and net profit of RM260.0m and RM51.0m respectively

• The potential acquisition is in-line with IHH’s strategy to be the leading premium healthcare service provider in Malaysia

• Maintain BUY with a revised TP of RM6.84 per share

Proposed acquisition of the entire equity stake in Prince Court. IHH Healthcare Bhd (IHH) announced that it has entered into a conditional share purchase agreement with Khazanah Nasional Berhad (Khazanah) for the proposed acquisition of the entire issued share capital of Prince Court Medical Centre Sdn Bhd (PCMC) for a cash consideration of RM1.0b. PCMC owns and operates a 277-licensed bed hospital located at the intersection of Jalan Tun Razak, Jalan Bukit Bintang and Jalan Kia Peng in Kuala Lumpur. The acquisition is expected to be completed in 1QCY20.

Highly regarded locally and internationally. PCMC is regarded as a tertiary hospital, tier-1 private hospital. It is ranked 4th among the six hospitals rated in the same category namely Gleneagles Kuala Lumpur, Pantai Hospital Bangsar, Sunway Medical Centre etc. In addition, PCMC is named one of world’s best for medical tourism in 2019 by Medical Travel Quality Alliance (MTQUA). It aims to be the leading healthcare provider catering for Malaysian, expatriates and international patients (medical tourism). Currently, its patients’ demography constitutes of Malaysian, expatriates and international patients at 70.0%, 25.0% and 5.0% respectively.

In a much better shape financially. It took PCMC over 10 years to breakeven in FY17 from its formation (2007) which is longer than the standard gestation period of five years for hospital. In FY18, it registered revenue and net profit of RM260.0m and RM51.0m respectively. This represents an encouraging net profit margin of 19.6%. In comparison, IHH has a normalised PATANCI margin between 8.0% to 11.0%. The turnaround in performance is mainly as a result of change in management and direction from 2012. The transformation initiatives undertaken by the management includes increasing its revenue base and cost savings which include initiatives such as renegotiation of supplier contracts and control over administrative expenses.

Potential acquisition in-line with growth strategy. We are positive on this potential acquisition of PCMC by IHH as we opine that: (i) this is in-line with its strategy to be the leading premium healthcare service provider in Malaysia and; (ii) this presents a good opportunity for IHH to increase its presence in Malaysia as currently the company has no other greenfield or brownfield plan to expand in Malaysia except of the extensions of several existing hospitals. With solid financials and a clear business strategy, we believe that PCMC is on the right track to become a leading healthcare provider regionally. Hence, we opine that this potential acquisition could be earnings-accretive for IHH in the future.

Acquisition price is justified. The acquisition price of RM1.0b for the entire equity stake translates to an implied EV/EBITDA multiple and EV/bed of 21.9x and RM3.7m respectively. This fall at a higher range of implied EV/EBITDA multiples (between 10.6x to 24.1x) and implied EV/bed (between RM1.0m to RM6.1m) of selected past transactions. For instance, the 98-bedded Amanjaya Specialist Centre Sdn Bhd located in Sungai Petani, Kedah (IHH’s most recent acquisition) fetched a valuation of 10.6x and RM1.0m based on implied EV/EBITDA multiple and EV/bed respectively. Nonetheless, we believe the acquisition of PCMC is justifiable given that: (i) it is a tier-1 private hospital; (ii) recognised as one of world’s best for medical tourism and; (iii) located in the prime area of Kuala Lumpur. Note that the acquisition price of RM1.0b is slightly lower than the original cost incurred by Khazanah of about RM1.1b to acquire the stake from Petronas in August 2018.

Funding and gearing. The total funding requirement for the transaction will be funded through both internally generated funds and external borrowings. However, the proportions have yet to be finalised at this juncture. Given IHH’s strong cash position of RM5.0b (of this, Parkway Pantai’s cash balance accounted of RM4.3b) and robust balance sheet with a net gearing of 0.15x as of 2QFY19, we expect only a trivial increase in net gearing.

Impact to earnings. As the acquisition is due to be completed in 1QCYFY20, we are making no changes to our FY19 earnings at this juncture. As for FY20F, we have lifted our earnings by +2.6% to account for the contribution coming from PCMC. The key risks to our earnings are: (i) delay in the completion of the deal; (ii) lower-than-expected inpatient admissions and revenue per patient and; (iii) increasing in cost of operations.

Target price. Post announcement, we are revising our target price to RM6.84 per share (previously RM6.66). We derived our target price based on DCF valuation method with assumption of terminal growth at 4.7% and WACC of 9.0%.

Maintain BUY. We continue to believe that the resilient demand and growth for healthcare services across all IHH’s home markets will continue to drive its earnings growth. The acquisition of PCMC will solidify IHH’s position as a leading premium healthcare service provider in Malaysia. That said, we acknowledge that the group is facing near term business headwinds particularly in the form of weak Turkish Lira as well as legacy issues within Fortis business. Nonetheless, we are maintaining our BUY recommendation as we are confident of IHH’s ability to response to these challenges. Management has taken active efforts to reduce the Lira foreign exchange impact while adopting a discipline turnaround plan for Fortis. Furthermore, IHH’s balance sheet remains robust with a net gearing of 0.15x premised on strong cash position of RM5.0b. In addition, we expect a long-term growth opportunities in India and Greater China as the markets are largely underserved. In summary, we like IHH for its: (i) geographically-diversified revenue base; (ii) robust balance sheet and; (iii) strategic expansion plans

Source: MIDF Research - 18 Sept 2019