• Maintain BUY and SOP-derived MYR7.50 TP, 15% upside. IHH Healthcare has submitted a proposal to Ramsay and Sime Darby for the acquisition of the JV hospital chain. Overall, we are rather neutral on the potential deal given the likely increase in financing costs is expected to impact earnings in the short term. However, we are more upbeat on the prospects over the longer term as Ramsay Sime Darby Health Care SB’s (RSDH) assets are a strategic fit with IHH’s cluster strategy and presents an entry into the Indonesian markets.

• Proposed acquisition of RSDH. IHH verified that it has submitted a non- binding, indicative proposal to Ramsay and Sime Darby (SIME MK, NEUTRAL, TP: MYR2.30) to acquire 100% of the health care JV, RSDH. The indicative enterprise value for RSDH is MYR5.67bn on a cash free, debt free basis. Ramsay and SIME have agreed to a period of exclusivity for four weeks to allow IHH to conduct due diligence. At the current stage, discussions are preliminary and there is no guarantee that a transaction will eventuate.

• Established presence in Malaysia and Indonesia. RSDH is a private healthcare group that operates four hospitals in Malaysia, three hospitals in Indonesia and a day surgery clinic in Hong Kong (Figure 1). Its presence in Malaysia and Indonesia is well established, with internationally recognised accreditations. Stripping off impairments, RSDH recorded MYR76m in core net profit for FY21 (Jun).

• Neutral on the potential acquisition. We believe RSDH augurs well with IHH’s cluster strategy to solidify its market share and expand its presence in the metro areas of Malaysia, given certain RSDH’s hospitals lie outside of IHH’s existing catchment area, thereby allowing for future expansion. Integration of the assets provides future potential cost synergies via procurement and shared services. Additionally, RSDH’s presence in Indonesia would serve as a beachhead in the underserved Indonesia market, where hospital beds per 1,000 individuals stand at 1.2 (among the lowest in ASEAN). On valuation, the indicative enterprise value implies an EV/EBITDA ratio of 21.8x. We deem this to be fair as it is in line with IHH’s past acquisition multiples and selected transaction multiples in the market. However, we expect potential negative earnings contribution in the immediate term, should the deal materialise, given the higher associated financing cost offsetting its existing earnings base – assuming it will be funded fully by debt, with gearing ratio expected to rise to 0.5x (from 0.2x currently).

• Maintain BUY and MYR7.50 TP. We make no changes to our forecasts, as the discussion is still preliminary at the current juncture. Valuation remains undemanding as IHH is currently trading at 14x FY22F EV/EBITDA (-1SD from its 5-year mean). We ascribe a 0% ESG discount/premium to our intrinsic value as its ESG score stands in line with the country median.

• Key risks to our call: Unfavourable Supreme Court ruling on the Fortis acquisition, emergence of a new variant, and longer-than-expected gestation periods.

Source: RHB Research - 23 Mar 2022