• NEUTRAL, MYR2.30 TP, 1% upside. We are positive on the potential deal, as we believe Sime Darby will use this opportunity to monetise its healthcare business at a fair valuation. IHH Healthcare's MYR5.67bn (cash and debt free) enterprise value offer implies a trailing 22x EV/EBITDA, in line with recent sector transactions. Post sale, SIME could better focus on its core competencies in the motor and industrial segments. With MYR2.63bn potential proceeds (accounting for RSDH’s debt), a special dividend is on the cards. This marks the transfer of coverage to Jim Lim.

• The proposal. IHH (IHH MK, BUY, TP: MYR7.50) has proposed to acquire 100% of Ramsay Sime Darby Health Care (RSDH) – a Ramsay and Sime Darby 50:50 JV – for an enterprise value of MYR5.67bn, on a cash and debt free basis. Against RSDH's trailing 12 months (T12M) EBITDA of MYR258.8m, the offer implies a T12M EV/EBITDA of 22x, in line with recent healthcare transactions, ranging between 20x and 22x. Accounting for RSDH's FY21 net debt, the offer implies a T12M EV/EBITDA of 20.3x.

• Positive on the deal. We think the offer is attractive as it aligns with SIME’s strategy to dispose non-core assets. Note that we value the company’s healthcare division (with a 50% stake in RSDH) at MYR1bn or 15 sen/share, which is at a discount vs IHH’s offer, given our conservative estimate on the CY22F share of contribution from the JV.

• Focus on core competencies. Beginning its restructuring in 2017 through its plantation and property IPOs, SIME has been re-evaluating its various businesses to focus on its core competencies in the motor and industrial sectors. Therefore, since Oct 2020, SIME has been mulling an IPO of RSDH. Even though the IPO was shelved in Feb 2022, citing a desire to further grow RSDH, we believe management may still find the IHH offer an attractive means to monetise RSDH, a non-core asset.

• Special dividend? Assuming a cash transaction, SIME may receive proceeds (accounting for RSDH’s net debt) of MYR2.63bn. As it has neither a pressing need to pare down debt nor plans for large capex/acquisitions, we believe a special dividend is on the cards.

• We make no changes to our estimates, as talks are still preliminary. We maintain our NEUTRAL call and MYR2.30 TP, as we remain cautious on China's slowing industrial segment and persistent shortage of car chips.

• Downside risks: The tax exemption withdrawal for foreign-sourced income received in Malaysia, weakness in coking coal prices, and lower-than- expected margins on steeper competition pose downside risks to the industrial division’s profitability.

Source: RHB Research - 23 Mar 2022