IHH Healthcare Bhd could become the biggest private hospital operator in the Klang Valley if it manages to acquire its close rival – the joint venture (JV) group of Ramsay Sime Darby Health Care Sdn Bhd (RSDHC).
With close to a nine-million population count as of 2020, the Klang Valley is the biggest urban market in Malaysia and with strong demand for the provision of private hospital services.
The indicative offer price for RSDHC is RM5.67bil.
RSDHC is a JV between Australian-headquartered Ramsay Health Care Ltd and Sime Darby Bhd and the group owns private hospitals in the Klang Valley such as the Subang Jaya Medical Centre which has a strong presence and brand familiarity in the city of Petaling Jaya.
If the sale is approved, it will then see the diversified Sime Darby group exiting the private healthcare business completely.
AmInvestment Bank research says in its note that it is “neutral” on the news, saying that the offer values Ramsay Sime Darby at an estimated financial year 2021 (FY21) ending June enterprise value to earnings before interest, taxes, depreciation and amortisation (EV-to-Ebitda) of 25 times and EV per bed of RM3.17mil.
“While this is higher than IHH’s FY21 (ending December) EV-to-Ebitda of 14.5 times, note that these numbers may not be fully comparable due to the difference in their financial year-end. Also, we understand that Ramsay Sime Darby’s earnings have yet to recover to the pre-Covid level. Hence there is still room for earnings improvement in the future,” it says.
AmInvestment Bank research maintains its “hold” call on IHH with an unchanged fair value of RM7.
RHB Research says in its report that RSDHC will fit well with IHH’s cluster strategy to solidify its market share and expand its presence in the metro areas of Malaysia, given some of RSDHC’s hospitals lie outside of IHH’s existing catchment area, which expands its reach.
“Integration of the assets provides future potential cost synergies via procurement and shared services,” RHB Research says. The research house has maintained its “buy” call and a sum of parts-derived target price of RM7.50 on IHH.
More importantly, it has to be noted that Malaysian private hospital earnings also count medical tourism as one of their earnings drivers, and RSDHC is no different.
There are expectations that a strong recovery in earnings to the mean level that was seen prior to the pandemic is expected for private hospital operators once international borders are reopened from April 1.
Sime Darby says in its annual report that RSDHC will soon capitalise on medical tourism, which is expected to resume with the expected lifting of travel restrictions ahead.
Once this happens, it would enlarge the earnings base for RSDHC in the near term and with that, it would be a quick and strong gain in hand for IHH, should the proposed acquisition proceed.
According to Sime Darby Bhd’s financial statements, its healthcare division in which RSDHC is parked under had been loss-making in the first half of the 2021 calendar year (CY21).
In the first half of CY21, Sime Darby reported that its 50% share in RSDHC recorded a loss of RM10mil. The second half of the CY21 was stronger for RSDHC with Sime Darby’s share of net profit at RM24mil.
In the notes to its financial statements, Sime Darby says that the losses in the first half were mainly due to an additional write-down of deferred tax assets and the impairment of assets.
Results were also weighed due to the recognition of dividend withholding taxes by RSDHC in CY21, Sime Darby says.
RSDHC appears to have already hit a trough in earnings in CY21 with a net profit of RM14mil recognised by Sime Darby due to the reasons that were stated above by the company.
RSDHC’s earnings performance in CY21 appears to be even lower than for CY20, when all private hospitals’ foreign patients then had been strongly impacted by the tight travel restrictions imposed from mid-March 2020 with the closing of international borders due to Covid-19’s rapid spread.
In CY20, Sime Darby’s share of recognised profits in RSDHC was at RM32mil when it had then experienced lower patient volumes due to tight interstate lockdowns in place following the Covid-19 outbreak during a good number months in that year.
Despite what appears to be a short-term blip in earnings for RSDHC, Sime Darby’s 2021 annual report says that it is serious in growing and sustaining this healthcare business.
Sime Darby also says it recognises the importance of the healthcare portfolio to the well-being of its entire group.
“We are committed to growing our healthcare footprint as it helps balance the cyclicality of our motors and industrial businesses. RSDHC’s hospital assets in Malaysia and Indonesia are poised to benefit from these structural megatrends,” Sime Darby says in its annual report.
Sime Darby also notes its brand equity and premium healthcare services are able to tap the higher value segment for private healthcare.
“With the reopening of borders, we expect a surge in demand for medical tourism. As one of the top medical tourism destinations in the region, Malaysia will benefit from this. Moving forward, we will continue to pursue opportunities to further broaden our healthcare footprint in the region,” it adds.