PETALING JAYA: The recent acquisition of Penang-based Island Hospital Sdn Bhd by IHH Healthcare Bhd
raises questions about whether the latter may have overpaid for an asset that will require additional investment for future development.
Near-term earnings accretion to IHH is expected to be minimal, leading to a slight dilution based on the group’s forecasts.
Some analysts project minimal earnings impact over the next three years.
It is also noted that more capital expenditures are needed to further grow the brownfield asset, given that the acquisition also includes a piece of vacant land adjacent to the existing hospital.
Approvals for this land, valued at RM223.4mil, have already been secured for future development.
Depending on the capital structure used for this acquisition, IHH’s gearing ratio is expected to rise but will likely remain at a comfortable level, which allows it to capitalise on future opportunities.
The acquisition coincides with increasing competition in Asean to attract medical tourists, which could limit any margin superiority or competitive advantages in the longer term.
IHH has pointed out the medical tourism potential of Island Hospital, noting that it is a leading medical tourism-focused private hospital in Malaysia, attracting one out of three inbound foreign patients.
It also highlighted that the hospital is strategically located in Penang, a regional hub for medical tourism, accounting for 51% of inbound foreign patients.
According to CIMB Securities, the acquisition price for Island Hospital implies a trailing enterprise value to earnings before interest, taxes, depreciation and amortisation (EV-to-Ebitda) ratio of 24.6 times as of June 30.
This represents a 22% premium over the 20.1 times trailing EV-to-Ebitda ratio from the Ramsay Sime Darby Healthcare Sdn Bhd sale last year and a 47% premium over the 16.7 times forecast 2025 EV-to-Ebitda of regional peers, it said.
Hong Leong Investment Bank Research believes the premium valuation is justifiable considering Island Hospital’s superior margin profile, with a first half-net profit margin of 15%.
The hospital’s strong growth prospects will likely see 2025 Ebitda growth of more than 40%, with potential for synergistic value creation that will fortify IHH’s Penang operations.
The deal also aligns with IHH’s intentions to expand into neighbouring Indonesia.
