• IHH Healthcare Bhd has proposed acquiring Island Hospital Sdn Bhd in Penang for RM3.92bn in cash.
   
• The acquisition is expected to significantly enhance IHH's role in medical tourism, potentially doubling its medical tourism revenue in Malaysia.

• We think the acquisition price of RM3.92bn for the entire equity stake is fair, as it implies an EV/EBITDA multiple of 19.2x. This is lower than the 21.9x for the 2019 acquisition of Prince Court.

• We believe this acquisition is earnings accretive. We estimate that it will boost its bottomline by circa 11.4% from FY26F onwards. This raises our TP to RM7.88 (from RM7.37). Maintain BUY.

IHH to Acquire Island Hospital in RM3.92bn Deal

Based on a Bursa announcement dated 4th September 2024, IHH Healthcare Bhd has proposed acquiring a 100% stake in Penang-based Island Hospital Sdn Bhd (IHSB) for RM3.92bn in cash. The acquisition, conducted through its subsidiary Pantai Holdings Sdn Bhd, includes IHSB’s 600-bed capacity and a land bank valued at RM223.4mn for future development. The acquisition is anticipated to be finalized by the end of the year. It is worth to note that, the deal is expected to enhance operational efficiency and generate over RM200mn in synergies within five years. IHH Healthcare will benefit from potential synergies, as it will now operate three hospitals in Penang with over 1,000 operational beds. This expanded network will enable better coordination of patient care, optimized resource utilization, and streamlined services, leading to improved overall performance and service quality.

To Further Strengthen IHH’s Leadership in Medical Tourism

Island Hospital is a highly valuable asset with strong operations, backed by a large pool of specialists and robust clinical offerings. Additionally, Penang attracts patients from Indonesia and other northern states like Perlis, Kedah, and Perak, expanding its effective catchment area. Situated in the rapidly growing Penang market, Island Hospital will allow IHH Malaysia to strengthen its leadership position and provide a platform for future growth through capacity expansion. The acquisition is also expected to significantly boost IHH's role in supporting the country’s medical tourism goals, potentially doubling IHH's medical tourism revenue in Malaysia. The group has guided that over one in three inbound foreign patients to Malaysia utilizes IHH's network of hospitals.

Acquisition Price is Fair

We view the potential acquisition of Island Hospital by IHH positively, as it aligns with IHH's strategy to become the leading premium healthcare provider in Malaysia. Additionally, the inclusion of vacant development land offers IHH an opportunity to further expand its presence in Malaysia, where the company currently has limited greenfield opportunity beyond available land in Johor. Island Hospital is expected to contribute double-digit revenue growth to IHH, with potential annual revenue exceeding RM3.13bn. Aside to that, no significant capital expenditure is anticipated, as Island Hospital is already well-equipped with high-quality medical devices and specialists. The acquisition price of RM3.92bn for the entire equity stake implies an EV/EBITDA multiple of 19.2x, which is lower than the 21.9x multiple for the 2019 acquisition of Prince Court, a tier-1 private hospital. We believe this acquisition is justified due to (i) Island Hospital's status as a world-class medical center and (ii) its strategic location in Penang, a rapidly growing market and attractive destination for inbound healthcare travellers.

Earnings Impact

We have increased our FY26 (refer table 1) and onwards earnings forecast to account for the anticipated accretive impact of the transaction on EPS and ROE starting in 2026, with Island Hospital expected to contribute double digit growth to IHH's total annual revenue.

Maintain BUY with a higher TP RM7.88

Maintain a BUY call with a revised TP of RM7.88 (up from RM7.37), as we have increased our FY26 and onwards earnings forecast. Our valuation is derived based on SOP valuation with a WACC of 7% for Parkway Pantai Limited, 11% for Acibadem.

Source: BIMB Securities Research - 5 Sept 2024