IHH said its subsidiary, Acibadem Healthcare Group, had entered into definitive agreements to acquire 100% of Kent Health Group.
PETALING JAYA: Despite the risks associated with the volatility of the lira, IHH Healthcare Bhd
’s proposed acquisition of a 100% stake in Kent Health Group in Izmir, Turkiye, through its unit is a positive development for the private healthcare group.
Given Kent Health Group’s portfolio, the deal is expected to add value to IHH’s performance in the long term, according to analysts.
Kenanga Research noted that the latest move by IHH was a step in the right direction in its quest to become a dominant private healthcare player in Turkiye, leveraging on its 90%-owned Acibadem Healthcare Group’s brand name, clinical expertise and track record.“We expect profits from the hospital to at least cover the financing cost over the short term and the acquisition to be earnings accretive over the medium to long term,” the brokerage said in its recent report.
Kenanga Research maintained its “outperform” call on IHH, with an unchanged sum-of-parts-based target price of RM7.20, pending the completion of the deal.
Last Thursday, IHH announced that its Acibadem would acquire Kent Health Group for an estimated 55mil (RM255mil) cash to further expand its footprint in Turkiye.
Kent Health Group operates the largest private hospital in Izmir, the 340-bed Izmir Kent Hospital with an attached cancer centre, as well as two medical centres in the city. Izmir is the third-largest city in Turkiye with a population of 4.4 million.
“We gathered that the hospital is operating at mid-teens earnings before interest, tax, depreciation and amortisation (ebitda) margin. Driven by procurement synergies and cost efficiency under the cluster strategy, the group expects ebitda margin from this hospital to range above 20% and turn profitable in the medium term,” Kenanga Research said.
“For illustration purposes, assuming a bed occupancy rate of 60%, average revenue per inpatient of RM9,000 and net margin of 10%, expect profits from the hospital to cover the financing cost of RM12.75mil (assuming 5% on RM255mil capital outlay) over the short term and the acquisition to be earnings accretive over the medium to long term,” it explained.
Nevertheless, Kenanga Research said the acquisition would increase IHH’s net debt and net gearing of RM5.8bil and 0.22 times as at Sept 30, 2022 to RM6.1bil and 0.23 times, which were “still manageable”.
The transaction was expected to be completed in the first quarter of this year.
Upon completion, Izmir Kent Hospital would be Acibadem’s 19th hospital in Turkiye and 25th globally, and the number of medical centres in Acibadem’s network would increase to 16.
“We are positive that the acquisition of Kent will bring more value to Achibadem’s and IHH’s performance in the medium to long term.
“However, the risk of lira foreign exchange on the group’s financials will continue to be a cause for concern. All in all, we like IHH as its medium to long term growth prospects remain intact. Moreover, with the gradual returning to pre-pandemic demand for healthcare, we maintain our positive stance on IHH,” it added.
MIDF maintained its “buy” call on IHH, with an unchanged target price of RM7.65, based on a price-earnings ratio of 31.3 times the estimated earnings per share of 24.5 sen for the financial year ending Dec 31, 2023 (FY23).
AmInvestment Bank Research (AmInvest) also retained its “buy” call on IHH, with an unchanged discounted cash flow (DCF)-derived fair value of RM6.89.
The brokerage noted that its fair value for IHH incorporated a 3% premium for its unchanged environmental, social and governance rating of four stars.
This implied an estimated FY23 price-to-book value of 2.3 times at parity to its five-year mean.
Commenting on the proposed acquisition of Kent Health Group, AmInvest said it viewed the transaction as in line with expectations, and accounted for in the DCF valuation model. The brokerage pointed out that in the November 2022 analyst briefing, IHH’s management had guided that the primary growth driver for FY23 would be the expansion of the group’s bed capacity in key regions, namely, Malaysia, India and Turkiye.
IHH reported a lower net profit of RM1.36bil on revenue of RM13.13bil for the nine months to September 2022, compared with a net profit of RM1.41bil on revenue of RM12.66bil in the corresponding period in the preceding year.
The lower earnings were mainly attributable to a high base effect, the decline in contribution from the group’s operations in Turkiye due to weakening lira, and a debit adjustment relating to the application of Malaysian Financial Reporting Standard 129.
