IHH Healthcare Bhd (Jan 31, RM6.30)
Maintain neutral call with an unchanged target price of RM6.58: IHH Healthcare Bhd via its wholly-owned subsidiary Pantai Medical Centre Sdn Bhd (PMCSB) entered into a sales and purchase agreement (SPA) with YNH Hospitality Sdn Bhd (YNHSB) and Kar Sin Sdn Bhd (KSB), a wholly-owned subsidiary of YNH Property Bhd, last Thursday.
The purpose of the SPA is for the proposed acquisition of a parcel of freehold land together with a five-storey purpose-built private hospital with 384 surface car parks — formally known as Pantai Hospital Manjung — in Perak. The proposed acquisition is for a total consideration of RM63 million and is expected to be completed within three months.
PMCSB has been leasing the land and property from KSB since 2014. The acquisition is expected to result in cost savings for IHH in the long run, which will also enable IHH to benefit from the appreciation of the property.
KSB has been still the registered owner of the land and property despite having sold the property to YNHSB back in March 2015. This is due to the mutual agreement between the two parties which results in KSB being the registered owner of the property while YNHSB is the beneficial owner of the property.
As at Dec 31, 2015, the net book value of the property is RM51.17 million. As such, IHH is planning to purchase it at a premium of 23.5%. However, we believe that the potential future savings in operations and future bed expansions will more than outweigh the premium paid.
IHH intends to fund the acquisition either via borrowings and/or internally generated fund. Assuming that the acquisition is fully funded by borrowings, IHH’s gearing ratio will remain at 0.21 times as the acquisition is relatively small.
That said, we do note that IHH’s cash position as of the third quarter of financial year 2016 amounts to RM2.1 billion, which is more than enough to fund the entire acquisition without external borrowings. We opine that IHH will most likely fund the acquisition via internally generated funds to make way for bigger acquisitions locally or abroad that will require heavy external borrowings.
We think that despite the resilient demand for and growth in healthcare services across all its home markets, we remain wary of 2017 as challenges persist. This is in terms of the continuous increase in operating costs, cost of living in its home markets and inflation in personnel wages. — MIDF Research, Jan 27