PETALING JAYA: The market is positive on IHH Healthcare Bhd
’s proposed acquisition of Penang-based Island Hospital for RM3.92bil, a price tag that analysts think is fair and justified.
At RM3.92bil, RHB Research said it represents a price per bed of RM3.9mil, assuming 1,000 beds.
This is slightly above the RM3.7mil price per bed acquisition of Ramsay Sime Darby Health Care (RSDH) by Columbia Asia.
Island Hospital will have about 500 beds in the third quarter of 2024, with the potential to increase total beds to 1,000 if a new wing is built on the vacant land adjacent to the existing hospital.
In terms of valuation, the transacted enterprise value to earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) multiple is 24.6 times, representing a 22% premium versus the RSDH deal’s 20.1 times.
“We believe the premium valuation is justifiable considering Island Hospital’s superior margin profile and growth prospect as well as potential synergistic value creation in fortifying IHH Penang’s operation.
“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 November), we estimate potential earnings accretion of 2% and 9% for 2024 and 2025,” RHB Research said in a note.
The research house kept its “buy” call on IHH, with a target price of RM8 per share.
Meanwhile, TA Research said the acquisition price of Island Hospital is “relatively fair”, which is in line with previous hospital acquisitions in Malaysia, ranging from 20.1 times to 31.3 times of EV/Ebitda.
“Overall, we are positive as the acquisition is expected to be earnings per share accretive from 2026.
“In addition, IHH Malaysia’s medical tourism revenue is expected to at least double, given Island Hospital’s status as the top medical tourism hospital in Malaysia,” it added.
TA Research has a “hold” call on IHH, with a target price of RM6.88.
Kenanga Research opined that the deal to acquire Island Hospital is expected to be short-term earnings dilutive with some gestation.
However, the research house likes the deal due to a strategic fit to expand complementary services in Penang which is a location integral to its cluster strategy.
The transaction to acquire Island Hospital from Comprehensive Care Sdn Bhd (CCSB) is expected to be completed by end-2024
CCSB is 78%-owned by private equity firm Affinity Equity Partners, 16% owned by Mark Wee (the founder of Island Hospital), and 6% owned by 41 other individual shareholders.
Commenting on the impact to IHH’s financials, Kenanga Research foresees IHH’s net debt and net gearing of RM6.5bil and 0.2 times as at June 3, 2024 to increase to RM10.5bil and 0.35 times, respectively.
“As Penang is IHH’s second-largest cluster in Malaysia, adding Island Hospital which is the largest private hospital in the state, will allow IHH to build on its leadership position in Penang and provide a platform for future growth,” it said.
The research house has an “outperform” call on IHH and a target price of RM7.73 per share.
