The research house said the RM750mil injection into Sunway Healthcare for a 16% stake is 22% higher that what it had ascribed to the business, which is a strong testament to its deep value.
The equity injection will also help Sunway Healthcare fund its hospitals expansion plan while maintaining a healthy net gearing under 0.5x.
Sunway Healthcare is expected to incur a capex of about RM2.5bil to increase its existing bed count from 740 to about 3,000.
Meanwhile, the deal will also provide the investment fraternity a clear timeline for an eventual IPO to monetise the assets, said Kenanga.
As a caveat for the RM750mil injection, GIC will require 12.5% IRR per annum, which means Sunway Healthcare will have to go for an IPO listing by the eighth year upon the first set of conditions precedents being met to provide GIC the option to cash out their investment.
Based on Kenanga's calculations, it believes Sunway Healthcare can meet the minimum market cap required to meet the 12.5% IRR requirement.
"Assuming Sunway Healthcare fetches an EBITDA multiple of 18x upon listing (straddling between IHH’s 19x and KPJ’s 13x), it will require an EBITDA of c.RM450m/annum to hit the RM7.3b market cap target (or EV of RM8.0b as we assumed net debt of RM0.7b).
"With their current bed count of 740 already raking c.RM130m EBITDA/annum, we think the targeted EBITDA is achievable as extrapolating to 3,000 beds will
provide an EBITDA of RM530m/annum," it said.
Kenanga maintained its FY21/22 earnings projections unchanged as income dilutio from the stake sale will be marginal.
It maintained a "market perform" recommendation with a higher sum-of-parts-derived target price of RM1.95 from RM1.77 previously.