• Maintain BUY and MYR8 TP, 25% upside. IHH Healthcare entered into a sale and purchase agreement with Comprehensive Care (CCSB) for the proposed acquisition of Island Hospital Penang (IHSB) for a total cash consideration of MYR3.9bn. We see positive synergies from the acquisition considering IHSB’s superior margin profile, promising growth prospect, and synergistic value creation in fortifying IHH Penang’s operation. We incorporate 0% ESG for IHH based on our in-house ESG scoring framework given its ESG score is the same as the country median.

• Background of IHSB. Founded in 1996, IHSB is a 600-bed tertiary hospital situated in the bustling city of George Town in Penang island. It is strategically connected, with just a 25-minute drive from Penang International Airport, enabling the hospital to tap into a large pool of medical tourists. The hospital is currently equipped with 103 consultation clinics and 14 operating theatres, offering a wide range of medical and surgical services including oncology, obstetrics and gynaecology, heart and ENT (ear, nose and throat) surgeries among many others. The sale and purchase transaction includes a vacant land adjacent to the hospital’s current location, with approvals secured for future development with an estimated 400 bed capacity – providing visible growth from greenfield opportunity.

• Our thoughts. The acquisition will be funded via internally-generated cash and external borrowings which will be determined at a later stage. The deal is expected to be completed by 2024, marking IHH’s second successful M&A in Malaysia following the acquisition of Timberland Medical Centre in Aug 2023. The MYR3.9bn price tag represents price per bed of MYR3.9m (assuming 1,000 beds) – slightly above the MYR3.7m price per bed acquisition of Ramsay Sime Darby Health Care (RSDH) by Columbia Asia. In terms of valuation, the transacted EV/EBITDA multiple is 24.6x (based on IHSB’s TTM EBITDA as at Jun 2024), representing a 22% premium vs the RSDH deal’s 20.1x. We believe the premium valuation is justifiable considering IHSB’s superior margin profile (1H24 PAT margin of 15%) and growth prospect (2025 EBITDA growth: >40%) as well as potential synergistic value creation in fortifying IHH Penang’s operation.

• Earnings revision and valuation. We make no changes to our earnings as the funding mix remains uncertain at this juncture. If the deal is funded by 80% debt and 20% cash (completed by Nov), we estimate potential earnings accretion of 2%/9% for 2024/25. This should translate to SOTP-derived TP of MYR8.20. Our current MYR8 TP implies 15x FY24F EV/EBITDA, in line with its 5-year historical mean. Key risks: Execution risks, lower-than-expected patient volume/revenue intensity, and higher-than-expected operating costs.

Source: RHB Research - 5 Sep 2024