By Sherilyn Goh
Despite posting double-digit growths for its second quarter of 2015 ended June 30, together with the announcement for the RM819 million acquisition of India’s Global Hospitals chain, IHH Healthcare seems to lack the necessary catalyst to go past the RM5.90 mark. Has it been fully valued and what are the growth drivers going forward?
Business model: Private healthcare services provider IHH Healthcare Bhd is Asia’s largest hospital operator by market value, currently setting its eye on adding 3,000 new beds to its existing 7,000 beds by 2017. It has since shifted away from its traditional market into non-traditional areas like the Middle East, North Asia, and South Asia, and also counts itself as the second-largest healthcare operator group in the world.
It owns Parkway Pantai – the largest private hospital operator of Southeast Asia – and the International Medical University in Kuala Lumpur. It is the majority shareholder of Acıbadem Healthcare Group, the largest Turkish private healthcare company.
Of its foreign markets, Singapore is one of the biggest, contributing over 30% to the group’s total revenue. The completion of Gleneagles Medini in Johor by the fourth quarter of 2015 (4Q15) is also expected to further draw in the Singaporean clientele.
The group has dual listings on the main markets of Bursa Malaysia Securities Bhd and Singapore Exchange Securities Trading Ltd respectively.
It was also announced on Aug 28 that the group has signed definitive agreements to acquire a 73.4% stake in the India-based Ravindranath GE Medical Associates Pte Ltd (Global Hospitals) for 12.84 bil rupees (RM819 mil), via its wholly-owned subsidiary Gleneagles Development Pte Ltd.
The acquisition of Global Hospitals – a chain of five hospitals with approximately 1,100 operational beds in Hyderabad, Bangalore, Chennai, and Mumbai – is expected to boost IHH’s beds globally to more than 8,000 across 45 hospitals in 10 countries.
Pending necessary approvals and satisfaction of certain conditions, the deal is expected to close within three months.
Prior to this, IHH already has a presence in India’s fast-growing hospital market via its 10.9% stake in Apollo Hospitals – one of India’s largest private healthcare providers; 51% stake in Continental Hospitals which was recently acquired in March 2015; as well as three joint ventures namely Apollo Gleneagles Hospital, Gleneagles Khubchandani Hospital, and Apollo Gleneagles PET-CT Centre.
The group has also continued to benefit from its diversified operations of 39 hospitals across 10 countries, including the newly-opened Acibadem Atakent Hospital in Turkey, Pantai Hospital Manjung, and Gleneagles Kota Kinabalu.
Moreover, the group has also managed to grow its medical tourism business especially through its Singapore operations. According to management, the patient mix between foreign and local is estimated to be 1:2 as the number of foreign patients from the Middle East grows.
Up to 32% of IHH Healthcare’s debts were previously denominated in the US dollar, which resulted in the group posting continued Lira exchange losses given the strong depreciation of the Turkish currency against the greenback.
In order to mitigate currency risks, the group has restructured its US dollar loans to a mixture of euro constituting 75% of debts, with the remaining 25% being in the US dollar.
Shareholders and management: The company’s top shareholders as listed in the Bursa are the company’s non-independent executive director Mehmet Aydinlar (3.2%), Kuwait Investment Authority (1.83%), Khazanah Nasional Bhd (43.54%), the Employees Provident Fund (9.3%), and Mitsui and Co Ltd (20.07%).
IHH Healthcare is run by its 49-year-old managing director and chief executive officer Dr Tan See Leng, a Singaporean with over 25 years of experience. He is also a director of Pantai Holdings Bhd, an indirect wholly-owned subsidiary of IHH.
Share price performance: IHH Healthcare closed on Sept 10 at RM5.87, down 2 sen.
For the past month its share price has been staggering below the RM5.90 mark, while the announcement of its 2Q15 results and acquisition of Global Hospitals have not seen to provide the stock with the necessary momentum to breach the RM6.11 mark, its one-year high on Aug 5.
What analysts think: The 2Q15 ended June 30 saw IHH Healthcare posting double-digit growths, including a 12.1% year-on-year (y-o-y) increase in revenue to RM2.1 billion; whereas earnings before interest, taxes, depreciation, and amortisation (Ebitda) grew by 12% y-o-y to RM545 million.
The strengthening Singapore dollar has also provided respite against the volatile exchange rates, offsetting the impact of a weaker Turkish Lira upon its conversion to the ringgit, which is IHH’s reporting currency. The same period saw IHH recognising an exchange loss amounting RM22 million on the conversion of Acibadem’s non-Lira borrowings.
In relation to that, Affin Hwang Capital lauded the group’s move in restructuring its US dollar-denominated borrowings, adding that the group will be able to service its new loans from its medical tourism receipts.
“We are positive on this move as it reduces the group’s exposure to currency risks, while the restructured loans will only expire in three years’ time,” said Affin Hwang Capital.
The research house is of the view that IHH Healthcare is likely to keep up with its strong earnings momentum moving into the second half of 2015 (2H15), as weaker sentiments due to the goods and services tax (GST) are expected to improve albeit progressively.
“We are expecting patient volume to gradually increase which should drive earnings going into 2H15 as the Malaysian public healthcare system still remains insufficient to support the population.
“In addition, we believe that demand for private healthcare in the Asean region will remain robust on the back of increasing healthcare awareness and increased affluence,” noted the research house.
Affin Hwang Capital maintained its “buy” call on IHH Healthcare, with a target price of RM6.71 based on sum-of-parts (SOP) valuation with discounted cash flow (DCF) as the main valuation method.
Not all, however, share the same optimism, as TA Securities is convinced that valuation still remains stretched at current levels. Maintaining its target price for IHH at RM5.80 per share, which translates into 21.3 times implied enterprise value to Ebitda (EV/Ebitda), TA Securities kept its “sell” call on the stock.
Maybank IB Research, on the other hand, believes that the positives attributed to the acquisition of Global Hospitals are in the price.
“We raise financial year 2016 (FY16) to financial year 2017 core Ebitda for IHH by 2% to 3% to incorporate this acquisition, but there is no earnings per share contribution. IHH should, however, benefit in the longer term as India could contribute more significantly when Global Hospitals scales up its operations.
“IHH trades at 19 times FY16 EV/Ebitda versus peers’ 18 times average. We raise our SOP target price to RM6.35 from RM5.35 as we roll over to FY16. This is still based on 22 times EV/Ebitda for its core business, its long-term mean,” said Maybank IB Research.
Earnings forecast:
Peer comparison:
StockStalk: It seems like IHH Healthcare is lacking catalyst which could provide the stock with the necessary momentum to propel it beyond the RM5.90 mark.
According to Kenanga Research, growth drivers in the next five years could come from the gradual ramp-up of Mount Elizabeth Novena in Singapore, the expansion projects of four hospitals in Malaysia including Gleneagles Kuala Lumpur and Pantai Hospitals, and numerous expansion of its Acibadem operations.
As Global Hospitals scale up its operations in the near future, the group can also anticipate to benefit from more significant financial contributions.
Given strong fundamentals, investors who are seeking value may want to hold on to their stocks for the time being, while greater catalysts present themselves in the near future.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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