IHH Healthcare entered into a share purchase agreement with Saravita Holdings and nine individual founders to acquire the entire equity interest in Bedrock Healthcare (BHSB) for a total consideration of RM245m.
“The deal, expected to be completed by 1H24, is subject to regulatory approval. As such, we make no changes to our estimates,” said RHB Research (RHB) in the recent Malaysia Company Update Report.
The planned acquisition will be fully funded in cash on a cash free, debt free basis. BHSB, through its wholly-owned subsidiaries, operates an 82-bed hospital, namely Timberland Medical Centre (TMC) in Kuching, Sarawak, and it has earmarked a vacant land in central Kuching for the construction of a 200-bed hospital (with further investment of RM400m).
Should the deal succeed, this would mark IHH’s maiden foray into Sarawak and strengthen its footing in East Malaysia. Currently it only operates a 121- bed Gleneagles in Kota Kinabalu.
RHB maintains the Buy call with a Target Price of RM6.80. To note, TMC offers a wide range of medical and surgical services including cardiology, nephrology, oncology, gastroenterology, geriatrics care, orthopaedic surgery, hepatology surgery, orthopaedic and urology.
“According to our channel checks, the RM245m price tag represents 12x over TMC’s earnings before interest, depreciation and amortisation,” said RHB.
Although the earnings accretion does not seem material in the near term, management sees potential synergies on achieving better operating efficiency with TMC going forward.
“We also do not rule out the possibility that TMC will serve as a medical centre to attract medical tourists given its close proximity to the Kuching International Airport (12-minute drive), aside from being surrounded by several 3-4 star hotels,” said the research house.
RHB expects IHH’s near term growth to be pivoted by inelastic consumer demand for healthcare services, a pick-up in health tourism, along with its announced 2,000 bed expansion plan which should continue to offer opportunities to strengthen its regional footprint given the current bed occupancy rate or BOR is nearing the optimal level.
Risks identified by RHB include execution risks, lower-than-expected patient volume/revenue intensity, and higher-than-expected operating costs.
