Thursday, 14 March 2013

IHH Healthcare - Maiden foray into Hong Kong

News  In an announcement to Bursa Malaysia, IHH announced that its wholly-owned Parkway HK Holdings Limited’s 60%-owned GHK had signed a Memorandum of Agreement and Conditions of Sale (Land Grant) as well as Service Deed with The Government of Hong Kong Special Administrative Region, having successfully won the bid by way of a public tender for the acquisition of a site identified as Aberdeen Inland Lot No. 458, Nam Fung Path, Wong Chuk Hang with a total site area and maximum gross floor area of approximately 27,500 square metres and 46,750 square metres respectively for the construction, development and operation of a private hospital.

 The remaining 40% balance is owned by Media Year Investments Limited, a wholly-owned subsidiary of NWS Holdings Limited (60.7%-owned subsidiary of New World Development Company Limited, one of Hong Kong’s top property developers), which is listed on the Main Board of The Stock Exchange of Hong Kong.

 The Li Ka Shing Faculty of Medicine of The University of Hong Kong (HKU) will play the role as a clinical partner, overseeing clinical governance, professional standards, appointment of doctors and the training of doctors, nurses and allied healthcare staff of the Hospital.

 NWS Holdings has experience and track records in designing and building hospitals, such as Kwan O Hospital; as well as extension and redevelopment of Hong Kong Sanatorium & Hospital, Hong Kong Baptist Hospital and St. Teresa’s Hospital.

Comments  It is estimated that the project will involve a total capital outlay of approximately HKD5.0b (RM2.0b), which is inclusive of the land cost amounting to HKD1.7b (RM675.4m), and would be funded by borrowings and internally generated funds.

 The hospital is expected to be fully developed and commercially ready by late 2016. It will provide a full suite of clinical services with more than 15 specialties, including general medicine, general surgery, orthopaedics, gynaecology and others, with a total capacity of 500 beds or about 7-8% of IHH’s total bed capacity.

 For illustrative purposes, assuming 80% in borrowings, at group level IHH’s net debt and net gearing will increase from RM1.1b or 6.3% to RM2.7b or 14% as at 31 Dec 2012.

 Assuming the hospital conservatively yields a ROI of 8% with a corporate tax rate of 16.5% and taking into account IHH’s 60% stake, this investment will rake in RM80m which is 12% and 10% of our FY13 and FY14 net profit estimates respectively.

Outlook  IHH’s growth driver in the next five years will come from all its three key markets namely Singapore, Malaysia and Turkey. IHH’s current pipeline will deliver over 3,300 new beds through new hospital developments and the expansion of its existing facilities over the next five years.

Forecast  No changes to our forecasts.

Rating   Maintaining our MARKET PERFORM rating and our sum-of-parts target price of RM3.51 pending more updates from the management.

Valuation  Given the highly defensive and captive earnings streams in the healthcare services, we are using the EV/EBITDA valuation methodology in our sum-of-parts valuation. Despite the scarcity premium that we have attached to IHH units given its sheer size, commanding market position and superior growth potential, IHH is currently already trading close to our target price.

Risks  A slower than expected commercial operation of its greenfield and brownfield projects.

Source: Kenanga

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