KUALA LUMPUR: IHH Healthcare Bhd's proposed RM3.9 billion cash acquisition of Island Hospital Sdn Bhd (IHSB), a Penang-based facility with a potential capacity of 600 beds, from Comprehensive Care Sdn Bhd, is viewed positively by analysts.
IHH plans to acquire a 100 per cent stake in Island Hospital, reinforcing its strategic growth in the healthcare sector, according to Hong Leong Investment Bank Bhd (HLIB Research).
The research firm said this is due to the assets being of high quality, possessing a strong brand name, and being strategically located on Penang Island, while also carrying a reasonable and attractive enterprise value (EV) price tag compared to past deals.
The firm also noted that the deal is core earnings-accretive, even with its conservative assumptions, and indicates that IHH is adhering to its disciplined M&A strategy, while ensuring Island Hospital does not fall into the hands of its competitors.
"We maintain our positive outlook on IHH for its resilience in a defensive sector and is strategically positioned to capitalise on global megatrends, particularly the ageing population.
"Hence, we maintain a "Buy" call on IHH with an unchanged sum of parts (SOP)-based target price of RM7.70," it said in a note today.
HLIB Research said excluding the value of the adjacent vacant land, the acquisition's implied EV for the financial year 2024 (FY24) is 19.2 times, which is lower than IHH's previous acquisitions of Prince Court Medical Centre (23.2 times) and Fortis Healthcare (22.3 times).
It is also below the 20.1 times seen in Columbia Asia's acquisition of Ramsay Sime Darby Health Care.
"Therefore, we consider the price tag attractive," it noted.
As for the forecast, the firm said there is no change to its earnings projection for FY24 to FY26, pending the completion of the acquisition by the end of 2024.
Echoing similar views, Public Investment Bank Bhd (PublicInvest) said it is positive on the move as this should help IHH to strengthen its foothold in Penang, gaining more market share given the growing medical tourism industry, especially from Indonesia.
"The acquisition is anticipated to yield over RM200 million in synergies over five years, with RM25 million projected for the first year, and is expected to be earnings accretive beyond FY26 forecast.
"However, our preliminary estimates suggest that IHH could potentially see less than five per cent earnings downside during the gestation period in FY25 to FY26 forecast," it added.
The firm noted that IHH's net debt or earnings before interest, taxes, depreciation, and amortisation (EBITDA) ratio would increase from 4.31 times to 4.46 times.
This is taking into account IHSB's net debt of RM276.3 million and assuming the acquisition is financed with an additional RM3.92 billion in bank borrowings.
Meanwhile, the firm said the gearing ratio would rise from 0.28 times to 0.41 times.
"At this juncture, we maintain our forecast pending the completion of this acquisition. We maintain our 'Outperform' call with an unchanged target price of RM7.68," it noted.