Huge premium for significant prospects

Sunway Medical Centre

PETALING JAYA: The large premium valuations that was ascribed to the 16% stake disposal in Sunway Healthcare to the Singaporean government through GIC (Ventures) Pte Ltd appears to be the main focal point of the deal that was announced on Wednesday.

The willingness by a foreign investor to pay such a huge premium also highlights that growth prospects remain intact within the private hospital healthcare segment in Malaysia with pockets of opportunities for those who are willing to wait it out for the longer term.

The deal sees GIC becoming Sunway Healthcare’s new shareholder with a 16% stake valued at RM750mil.

According to RHB Research, the transaction values the entire Sunway Healthcare company at RM4.69bil.

It also noted that the valuations for this deal are at a big premium compared with listed private hospital operators such as IHH Healthcare Bhd and KPJ Healthcare Bhd.

“According to the announcement, the implied enterprise value to earnings before interest, taxes, depreciation and amortisation (Ebitda) multiple is 31.33 times based on the trailing 12-month Ebitda of RM130mil for Sunway Healthcare, ” RHB Research said.

“This is at a substantial premium compared with 19.08 times for IHH and 13.85 times for KPJ Healthcare, ” the research house added.

RHB highlighted the stake sale agreement saw Sunway “promising” GIC an internal rate of return (IRR) of 12.5% based on the ringgit and included a 3% preferred dividend while the proposed initial public offering for Sunway Healthcare would have to be completed by Jan 31, 2028.

“Valuation adjustment is capped at 4.5% and US$10mil (RM42mil) for share and cash top-up. If Sunway defaults on its obligations, GIC will exercise a put option that enables it to achieve a minimum US dollar IRR of 18.5%, ” RHB Research said.

“Given the punitive financial consequence, we believe management will ensure that the listing of Sunway Healthcare happens before the deadline, ” it added.

Meanwhile, TA Research highlighted that the implied equity value for Sunway Healthcare from this stake sale is equivalent to around 53% of Sunway Bhd’s current market capitalisation.

Sunway’s shares declined by five sen at its close to RM1.73 yesterday in line with the negative broader market sentiment on the Bursa Malaysia.

“Based on a price per bed basis, the disposal price is also compelling. Sunway Healthcare’s current bed capacity of 856 beds implies a value of RM5.5mil per bed compared with the average listed hospitals in Malaysia of RM2.1mil per bed, ” the research house pointed out.

“Nonetheless, we believe the premium valuations takes into account of Sunway Healthcare’s strategic expansion plan. The price per bed would work out to around RM1.8mil upon the completion of the six new medical facilities, which will increase the group’s total bed capacity to 2, 560 beds, ” TA Research added.

While it was positive on the deal, it also noted that it was surprised by the hefty premiums that Sunway Healthcare is able to fetch.

“This suggests GIC’s confidence in Sunway’s ability to grow its healthcare division, ” it said maintaining its “buy” rating on Sunway with a higher target price of RM2.23 based on the sum-of-parts valuation.

MIDF Research pointed out that the stake disposal in Sunway Healthcare is expected to reduce earnings contribution from the healthcare segment to Sunway Bhd going forward.

“Hence, we revise our financial year 2021 (FY21) and FY22 earnings forecast by -0.8% and -2.2% respectively.

“Nevertheless, we revise our target price for Sunway to RM1.72 from RM1.55 due to higher value that is unlocked for the healthcare segment in our SOP valuation, ” MIDF Research said with a “neutral” call on Sunway.

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