We maintain BUY call on IHH Healthcare (IHH) with unchanged sum-of-parts (SOP)-based fair value (FV) RM7.80/share , which implies FY25F P/E of 30x, a 25% discount to its 5-year average of 40x. In addition, the incorporates a 3% premium with our unchanged ESG rating 4 stars .
We are positive on the longer-term prospects of IHH proposed acquisition of Island Hospital (IH), located at Ja Macalister, George Town, Penang , for RM3.9bil ca which is expected to be completed by end of this year.
The transaction includes an adjacent vacant land measuring acres, valued at RM223mil or bargain RM173 psf vs. o RM300-RM500 psf for commercial land near the area. This la could significantly expand IH’s bed capacity by 400 to 1k.
Ex-vacant land, the acquisitive FY24F EV/EBITDA of 19 appears fair vs. 21.9x for IHH’s acquisition of Tier-1 hosp Prince Court Medical Centre in Sep 2020 and 20.7x for Rams Sime Healthcare in Sep 2022.
Management expects IH to register a strong EBITDA growth 45% in FY24F and at least 20% in FY25F, propelled by doubling of capacity from 296 beds in 3Q2022 amid ris revenue/inpatient admission (Rev/IP) intensity.
Assuming a FY25F earnings growth of 20%, synergies RM25mil, one-off acquisition costs of 27mil and interest cha of 4% on debt raised, we estimate that the IH acquisition co have a neutral impact to FY25F earnings and a slight increment to FY26F.
We also estimate that the proposed IH acquisition will raise group’s FY25F net debt/EBITDA from 1.0x currently to 1. which remains comfortable given the group’s visible earnin profile.
IH will be the group’s third Penang hospital together with Pan Hospital and Gleneagles Hospital, which is only 2km away fr IH. This is a prestigious hospital which focuses on medi tourism with the largest pool of specialists who are hig ranked in their fields, including orthopeadics, oncolo cardiology, gastrointestinal and general surgery.
In 1H2024, 60% of IH’s revenue stemmed from foreign patien of which 90% were from Indonesia (equally shared with No Sumatrans, Javans and the rest of Indonesia).
With IH’s 500 operational beds (which can be scaled up to 6 beds with minimal capex), this will raise the group’s Malays bed capacity by 17% to 3.5k. The group estimates 1H’s FY2 average Rev/IP to reach RM12k, which is commendably hig by 12% vs. the 2QFY24 average of RM10.7k for the grou Malaysian hospitals.
IH will be one of the largest hotels in IHH’s domestic network which offers substantive cross-selling opportunities given the lack of expansion prospects for the existing 2 Penang hospitals. From IH, management expects to generate synergies of over RM200mil over the next 5 years with RM25mil for the first year of acquisition.
Going into 2HFY24 onwards, we expect the group’s robust revenue trajectory to be sustainable, supported by rising rev/IP intensity and the expansion of the group’s bed capacity from 12k currently by 4k over the next 5 years, particularly in Malaysia (+1,300), India (+1,860), Acibadem (+1,040) and Hong Kong (+170), as well as continuing EBITDA margin improvements for operations in India and China.
We deem that the stock currently trades at an attractive FY25F PE of 25x vs. its 5-year average of 40x while a healthy FY24F net debt/EBITDA of 1x offers leverage for cluster-based acquisitions to fuel growth prospects.
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