IHH’s RM1b Prince Court acquisition expensive, analysts say


IHH Healthcare Bhd’s proposal to acquire Prince Court Medical Centre Sdn Bhd (PCMC) for RM1.02 billion in cash from Khazanah Nasional Bhd appears expensive, judging from its potential contribution.

AmInvestment Bank Bhd believes the acquisition will have a minimal impact on IHH’s earnings.

“The acquisition is expected to drag IHH’s earnings in the immediate term as PCMC’s earnings contribution of RM26 million will not be enough to cover the net financing cost of the acquisition,” it said.

Kenanga Research forecasts that the acquisition will contribute less than 1% to IHH group’s earnings, based on the hospital’s normalised net profit of RM26 million for financial year 2018 (FY18).

“The acquisition will only put a small dent to IHH’s net gearing of 0.2 time as at June 30, 2019.

“PCMC, which is one of the key strategic private hospitals in the Klang Valley, is expected to enable IHH to leve- rage on its wide network of hospitals to deliver potential synergies and offerings,” Kenanga Research said in a research note yesterday.

Kenanga Research expects the healthcare group will face tough operating conditions on the back of uncertain outlook and volatility for the Tur- kish lira, which has depreciated significantly against the US dollar, euro and the ringgit.

IHH pared down US$250 million (RM1.04 billion) equivalent of its non-lira debt for Acibadem Healthcare Group in April as part of an ongoing plan to reduce the exposure to Turkish lira’s volatility.

“The remaining balance of US$300 million is expected to be pared down sometime in 2020,” Kenanga Research noted.

Kenanga Research has placed a target price (TP) of RM4.85 on IHH, pegged to 38 times FY20 earnings per share.

Based on the latest quarter financials, IHH has an ample cash balance of RM5 billion to fund the acquisition.

In order to maximise the leverage in its balance sheet, IHH is looking into a combination of internally generated funds and bank borrowings to finance the purchase, expected to be completed by the first quarter of next year.

On the matter of IHH’s prospects, AmInvestment expects the private healthcare group to grow — supported by sustained demand in all of its markets, expansion in multiple countries, continuous improvement in patient admission volumes, improved revenue intensity with more complex cases and cases mix, better operating leverage and tighter costs controls.

“These will be partly dragged by the possible impending drug pricing controls, pre-operating and start-up costs of new operations and wage inflation,” AmInvestment said.

The research house has placed a TP of RM5.50 on IHH based on a discounted cashflow valuation methodology.

IHH’s share price rose six sen yesterday to RM5.75, giving the company a market valuation of RM50.1 billion.

PCMC operates 277 licensed beds, offering a wide range of medical, surgical and hospital services including cancer, gastrointestinal diseases, interventional cardiology, in vitro fertilisation, nephrology, occupational health, orthopaedic and rehabilitation medicine.