Strong valuations for A1H’s planned IPO?

THREE years after Columbia Asia’s purchase of Ramsay Sime Darby Health Care Sdn Bhd (RSDH) prompted some questions about inflated pricing, Asia OneHealthcare Bhd’s (A1H) proposed listing offers a fresh litmus test for hospital valuations.

Investors must assess how much value the enlarged business has created amid continuing pressure over treatment costs and concerns on medical inflation.

At end-2023, Columbia Asia Healthcare Sdn Bhd, then indirectly owned by Hong Leong Group and TPG-managed funds, acquired RSDH from Sime Darby Bhd and Australia’s Ramsay Health Care Ltd for RM5.68bil cash.

The acquiring company was renamed A1H in May 2024.

According to its draft prospectus, A1H is wholly owned pre-proposed listing by HLT Healthcare Holdings Singapore Ltd, with Hong Leong Group, TPG-managed funds and other investors holding interests through its ownership structure.

The RM5.68bil price tag then implies an enterprise value (EV) of RM6.06bil, or 20.1 times earnings before interest, tax, depreciation and amortisation (Ebitda), based on RSDH’s financial year ended June 2023. The price followed competitive bidding and included full control.

Four familiar Malaysian assets from that transaction remain within A1H: Subang Jaya Medical Centre, Ara Damansara Medical Centre, Bukit Tinggi Medical Centre and ParkCity Medical Centre.

They now sit alongside Columbia Asia hospitals and specialty facilities including Beacon Hospital and Cardiac Vascular Sentral Kuala Lumpur.

A1H operates 23 hospitals, comprising 22 in Malaysia and one in Vietnam. The three Indonesian hospitals acquired in the RSDH transaction are not part of the listing.

Consequently, comparing the group’s eventual market value with the RSDH purchase price would also likely need to take into account its additional asset acquisitions and capital invested.

A1H’s draft prospectus leaves its offer price and valuation blank for now. Some recent estimates note any listing could value the company at about RM30bil.

However, the heightened regulatory policy environment now remains a wildcard that could put some pressure on these lofty valuation targets.

MediAsas, a voluntary medical insurance and takaful plan, is scheduled for nationwide launch in January 2027.

Budget 2027 also provides for standardised private hospital billing categories next year, intended to improve transparency and make charges easier for patients to understand.

Alongside MediAsas, diagnosis-related group (DRG) payments are targeted to begin progressively from January, although they would begin as a voluntary initiative for private hospitals at the plan’s inception; based on a Health Ministry spokesperson’s statement at a press briefing in September.

Hospitals will receive pre-determined payments for treatment episodes grouped by diagnosis, procedure and severity, changing the incentives associated with charging separately for each service.

The DRG is seen to potentially pressure private hospitals’ earnings, indicative of what had happened when this was implemented in other countries’ private hospital industries.

For private hospital groups here, the commercial implications could run both ways.

More affordable coverage could support patient volumes, while case-based payments would increase the importance of controlling treatment costs.

Larger networks could benefit from purchasing efficiencies, provided savings translate into sustainable returns and appropriate care.

In its prospectus exposure document, A1H reported Ebitda of RM899.5mil and adjusted Ebitda of RM970.4mil for its financial year ended March 2026 (FY26).

The adjusted measure adds back selected expenses, principally employee and doctors’ share-based payments.

Both figures include contributions from acquired hospitals.

These include the four former RSDH Malaysian hospitals acquired in December 2023 and majority interests in five specialty hospitals acquired through the TE Asia transaction in August 2024 – ALTY Orthopaedic Hospital, Beacon Hospital, Cardiac Vascular Sentral Kuala Lumpur, Hospital Picaso and Northern Heart Hospital Penang.

Separately, its supplementary FY25 adjusted Ebitda of RM912.3mil assumes the TE Asia acquisitions contributed for 12 months based on management’s estimates, compared with eight months in the combined financial figures.

Comparing this with FY26’s RM970.4mil indicates an approximate 6.4% growth.

The group’s expansion plans moving forward may indicate further growth.

Its draft prospectus identifies 470 built beds that were not yet licensed or operational as at March 31 this year.

“As part of our expansion strategy, we plan to achieve a total bed capacity of approximately 3,900 beds by March 31, 2032 through executing planned brownfield expansion plans, while also upgrading our hospitals to increase case acuity and optimise case mix.

“We are also actively evaluating additional expansion projects that, if implemented, would increase our total bed capacity by approximately 600 to 1,000 additional beds,” A1H says in its draft prospectus document.

Against this backdrop, a valuation of around 20 to 25 times FY26 adjusted Ebitda appears to be a more realistic target, amid increased regulatory oversight today.

This compares with Sunway Healthcare Holdings Bhd’s EV/Ebitda multiple of 37.6 times forecast FY26 Ebitda in RHB Research’s Nov 2 report.

Sunway Healthcare’s initial public offering earlier this year was priced at an EV/Ebitda of 36.1 times historical FY24 Ebitda, according to its prospectus.

The earlier RM30bil of equity value based on some analyst’s estimates would imply approximately about a 32 times EV/Ebitda valuation.

These developments also quite likely rule out any potential acquisition plans by IHH Healthcare Bhd at this late stage.

A higher valuation could be supported by stronger forward earnings should expansion plans remain intact amid greater scrutiny on hospital bills and continued aggressive expansion plans by other operators in the industry.

Meanwhile A1H’s draft prospectus, using FY25 earnings and prices at its latest practicable date, values Sunway Healthcare at 48.5 times EV/Ebitda, against IHH’s 16 times and KPJ Healthcare Bhd’s 13.8 times, indicating there could be valuation arbitrage opportunities amongst these players.

Sunway Healthcare’s premium appears to build in substantial growth expectations.

RHB Research in its Nov 2 report forecasts its Ebitda increasing from RM657mil in FY26 (ending Dec 31) to RM847mil in FY27, equivalent to approximately 29% forecast annual growth.

That leaves a demanding execution test, whereby hospital openings and increasing bedcount, occupancy, staffing costs and the profitability of additional specialist services must deliver sufficient returns to sustain such bullish expectations.

A high trading multiple at one hospital operator does not give a credible basis on what investors should potentially pay for others, an analyst points out.

“It would appear that any item or service with the ‘healthcare’ tag on it would automatically demand lofty valuations these days.

“But would this continue to sustain especially with the exponential rise of artificial intelligence?,” the analyst notes.

For A1H, the proposed listing’s valuation case ultimately rests on converting any strong advantages from having a larger hospital group into durable earnings.

As regulatory reforms relating to DRG and government-spurred initiatives such as MediAsas gather pace, it is understandable that A1H’s vendors would want to push for this listing as soon as possible.

But prospective investors will need to judge whether those earnings can meet those strong growth targets and valuations amid the changing private hospital industry landscape.