Yesterday, the board of IHH proposed to buy Island Hospital for RM3.92bn, with the transaction expected to be completed by 4Q24. We consider the offer price as fair, as the acquisition is valued at an EV/EBITDA of 24.6x, which is in-line with previous hospital acquisitions in Malaysia, ranging from 20.1x to 31.3x. Overall, we are positive as the acquisition is expected to be EPS accretive from 2026. In addition, IHH Malaysia medical tourism revenue is expected to at least double, given Island Hospital status as the top medical tourism hospital in Malaysia. No change to our earnings estimates pending completion of the acquisition. Maintain Hold on IHH with an unchanged TP of RM6.88/share based on SOTP valuation.

Acquiring 100% Stake in Island Hospital for RM3.92bn

IHH has proposed to acquire 100% stake in Island Hospital, Penang from Comprehensive Care for a cash consideration of RM3.92bn. This acquisition also includes a vacant land (adjacent to the currently built hospital) which is valued at RM223.4mn with approvals secured for future development – see Figure 1.

The proposed acquisition is expected to be completed by the end of 2024 and will be funded via internally generated funds and bank borrowings.

Island Hospital Is a Highly Attractive Asset

Island Hospital is strategically located on the Penang Island and has increased its built bed capacity from 296 beds in 3Q22 to a total of approximately 500 beds in 3Q24 with an ability to expand to 600 beds. The hospital is accredited by the Australian Council on Healthcare Standards, with 9 Centre of Excellence and is supported by 119 resident and visiting specialists, offering a wide array of clinical services. More importantly, Island Hospital is the top medical tourism hospital in Malaysia, supported by an established ecosystem developed over 3 decades. The hospital attracts approximately one out of three inbound foreign patients into Malaysia. We gathered that medical tourist accounted for about 60% of Island Hospital FY23 revenue.

In terms of key operational metrics, the average revenue per inpatient admission is c. RM12k while inpatient admissions and outpatient visits exceed 42k and 430k annually, respectively.

In terms of financial performance, Island Hospital’s had reported revenue of RM573.8mn (+49.6%) and net profit of RM73.5mn (+53.8%) for FY23, representing approximately 2.7% and 6.0% of IHH’s FY23 revenue and core profit respectively.

In 6M24, Island Hospital reported PAT and revenue growth of 54.1% and 21.6% YoY to RM49.5mn and RM327.0mn, respectively.

Moving forward, we are confident that Island Hospital growth would continue, with an expected profit increase of at least 20% in 2025. This growth is anticipated to be driven by: i) continued ramp up of bed capacity/services (Island’s BOR is currently around 50%), ii) volume growth, iii) higher revenue intensity and iv) decanting of patients from Gleneagles Penang (which is at full occupancy, especially weekdays). Management expects the acquisition to be EPS accretive from 2026 and anticipates value creation through synergies of more than RM200mn over the next 5 years.

Our View

According to announcement, the Island Hospital is valued at an implied EV/EBITDA of 24.6x (based on trailing 12 months results up to 30 June 2024). More importantly, management added that the enterprise value of the transaction implies 19.2x 2024E EBITDA (c. RM207mn). Note that the 2024E EBITDA of c. RM207mn represents about 45% YoY growth over FY23 EBITDA. In our opinion, the acquisition price of Island Hospital is relatively fair, which is in-line with previous hospital acquisitions in Malaysia, ranging from 20.1x to 31.3x (see Figure 6).

As far as PER is concerned, IHH’s bid of RM3.7bn (excluding the value of the vacant development land of RM223.4mn) is valued at FY23 PER of 50.4x.

Based on price/bed (see Figure 7), Island Hospital bed capacity of 600 beds implies a value of approximately RM6.2mn per bed (vs. average listed hospitals in Malaysia of RM2.9mn/bed). Nonetheless, we believe the premium valuation takes into account Island’s future expansion. The price/bed would work out to around RM3.7mn upon the potential additional hospital wing, which will increase Island’s total bed capacity to 1,000 beds.

All in all, we are positive on the acquisition. Island Hospital (600 beds) will be IHH’s third hospital in Penang, joining Gleneagles Hospital in George Town (360 beds) and Pantai Hospital in Bayan Lepas (190 beds). Penang is an attractive destination for inbound healthcare travellers, particularly from the Indonesia. As Penang is IHH’s second largest cluster in Malaysia, we believe the group would be able to strengthen its leadership position in the region and provide a platform for future growth. With the acquisition of Island Hospital, we project that IHH’s medical tourism revenue in Malaysia will at least double (compared to approximately RM230mn in FY23). Furthermore, we expect to see synergies through cross referrals within the IHH network, increased medical tourism penetration, group procurement and process optimisation.

Operational wise, we believe that IHH’s Malaysia revenue intensity would grow by 8-10% driven by more complex cases and higher medical tourist. Note that Island Hospital revenue intensity (RM12k per inpatient) is higher than IHH Malaysia (vs. RM10.7k per inpatient in 2Q24). Based on our estimates, we expect the acquisition of Island Hospital to be EPS accretive in FY26 (+3.5%). Separately, net gearing is expected to increase to about 0.3x (vs. 0.21x as at 2Q24).

Impact

No change to our earnings estimates pending completion of the acquisition.

Valuation

Reiterate our Hold recommendation on IHH with an unchanged target price of RM6.88/share based on SOTP valuation.

Source: TA Research - 5 Sept 2024