RHB Research has maintained a “Buy” recommendation for IHH Healthcare with a target price of RM7.50.
RHB said that it makes no changes to our forecasts, as the discussion on IHH Healthcare’s submission of a proposal to Ramsay and Sime Darby for the acquisition of the JV hospital chain is still preliminary at the current juncture.
Overall, It said that it was rather neutral on the potential deal given the likely increase in financing costs is expected to impact earnings in the short term.
RHB is however more upbeat on the prospects over the longer term as Ramsay Sime Darby Health Care SB’s (RSDH) assets are a strategic fit with IHH’s cluster strategy and presents an entry into the Indonesian markets.
The research house said that it believes RSDH augurs well with IHH’s cluster strategy to solidify its market share and expand its presence in the metro areas of Malaysia, given certain RSDH’s hospitals lie outside of IHH’s existing catchment area, thereby allowing for future expansion.
“Integration of the assets provides future potential cost synergies via procurement and shared services. Additionally, RSDH’s presence in Indonesia would serve as a beachhead in the underserved Indonesia market, where hospital beds per 1,000 individuals stand at 1.2 (among the lowest in ASEAN). On valuation, the indicative enterprise value implies an EV/EBITDA ratio of 21.8x.,” RHB said.
RHB said that it deems to be fair as it is in line with IHH’s past acquisition multiples and selected transaction multiples in the market. “However, we expect potential negative earnings contribution in the immediate term, should the deal materialise, given the higher associated financing cost offsetting its existing earnings base – assuming it will be funded fully by debt, with gearing ratio expected to rise to 0.5x (from 0.2x currently),” it said.
