Positive on IMU sale
? IHH has entered into a definitive agreement for the sale of its medical
education arm International Medical University (IMU) for RM1,345m.
? The deal is valued at 16.6x of IMU’s FY21 EV/EBITDA, and is expected to
complete in 1Q23F, subject to relevant regulatory approvals.
? Reiterate Add, with an unchanged SOP TP of RM8.12. We like the deal as it
allows IHH to focus on investments in its core healthcare service businesses.
Details of the deal
? The deal is valued at 16.6x EV/EBITDA based on IMU’s adjusted EBITDA for FY21 of
c.81.4m. Under the agreement, IHH will be selling its entire stake of IMU to a consortium
led by TPG’s The Rise Fund and the Hong Leong Group.
? Apart from the medical education business that is held through IMU Healthcare (IMUH),
the sale also includes a hospital under construction, which is designated to be a teaching
hospital for IMU. There will be a proposed restructuring to hold the new hospital under
a newly incorporated entity (Hospital HoldCo). Although IMUH and Hospital HoldCo will
be separately sold to Inbound Education Holdings (IEH) and Columbia Asia (CASB),
respectively, both IEH and CASB share common shareholders (i.e. TPG and the Hong
Leong Group, which each own 45% and 49.95% of IEH and CASB, respectively).
? The deal will not be subjected to shareholders’ approval, but is subjected to approval
from various regulatory bodies, in relation to the proposed restructuring of Hospital
HoldCo and the subsequent disposal of IMU and the Hospital HoldCo.
? Barring any hiccups, the deal is expected to complete in 1Q23F.
Impact to financials
? Apart from the potential gain on divestment of c.RM900m (10.3 sen/share), the impact
from the sale of IMU will not be significant on IHH’s earnings as IMU’s FY21 revenue/net
profit of c.RM252.7m/RM54.5m represented c.1%/3% of IHH’s FY21 revenue/net profit.
? The sales proceeds of RM1,345m will bring IHH’s net debt down from RM5.9bn to
RM4.6bn, based on FY21 net debt levels. This could also lead to potential finance cost
savings for IHH of RM125m per annum. IHH’s FY21 finance costs stood at RM1.1bn.
The deal looks both financially and strategically sound
? It is difficult to find a precedent transaction as a benchmark as most healthcare
education businesses are private, but an implied valuation of 16.6x EV/EBITDA
suggests value creation for IHH, which is currently only trading at 14.8x of our forward
EV/EBITDA.
? Strategically, IMU also does not fit into IHH’s goals of leveraging its brand, and the deal
will enable IHH to deploy the proceeds to optimise operations and focus on its core
hospital businesses, such as expanding its existing hospital clusters, entering new and
adjacent markets, as well as investing in its diagnostics business.
IHH remains strategically focused; reiterate Add with TP of RM8.12
? IHH remains steadfast in executing its business strategy to grow its existing hospital
clusters, with a greenfield hospital in Turkey slated to open in 2H22F, as well as ongoing
due diligence to acquire business from Ramsay-Sime Darby that will both enhance
IHH’s Klang Valley cluster and expand into the Indonesian market.
? We think that current valuations for IHH remain attractive, and its SOP-based TP of
RM8.12 implies a forward EV/EBITDA of 16.2x, which is lower than its 5-year historical
average of 19.2x.
? Re-rating catalysts: accretive acquisitions through pockets of opportunities in India and
Europe, and swifter return of patients in Singapore and Malaysia.
? Downside risks: unsuccessful closure of ongoing deals, weaker revenue intensities
across operating geographies, and depreciation of the lira.