![IHH has 'plenty [of] opportunities to grow' despite termination of Ramsay Sime-Darby acquisition: CGS-CIMB](https://edgemarkets-transferred.s3-ap-southeast-1.amazonaws.com/IHH_1_0.jpeg?u_yBcfxmorFXFie90r4ZDG4JDzr0NwYS)
CGS-CIMB Research analyst Tay Wee Kuang is still recommending investors “add” their positions into IHH Healthcare Bhd even after discussions in relation to the acquisition of Ramsay Sime Darby Health Care Sdn Bhd were terminated.
Tay has retained his target price of RM8.07 ($2.50).
On Sept 9, IHH announced that the discussions between itself, Ramsay and Sime Darby Holdings have concluded and that they did not result in a binding agreement.
“IHH’s initial offer price of RM5.67 billion in enterprise value represented an EV/ebitda of [around] 25x based on Ramsay-Sime Darby’s reported ebitda of RM226 million for FY2021, which is more than an 80% premium to IHH’s current valuation of 14x forward EV/ebitda,” Tay notes.
On the termination, the analyst thinks IHH is exercising prudence in its capital use, especially given the rising interest rate environment. The way he sees it, the current environment may make any accretion to earnings from the acquisition less attractive.
“We do not foresee any downside risk to IHH’s earnings with the deal falling through as we have not included contribution from the potential deal in our earnings forecasts,” he writes.
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To be sure, the analyst sees “plenty [of] opportunities” for IHH to grow.
“IHH remains on the lookout for potential growth, especially with its disposal of International Medical University (IMU) announced in 2QFY2022 that IHH expects to be completed by 1QFY2023. The sale will free up RM1.35 billion in capital for IHH,” he notes.
Even without the Ramsay-Sime Darby deal, IHH will be boosting its bed capacity with its acquisition of Ortopedia Hospital in Adana, Turkey, and the opening of a new floor at Fortis Hospital, Mulund in India, he adds.
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“We think that such bolt-on acquisitions and organic expansion plans through the opening of new hospital wings to increase bed capacity could yield better results compared to larger acquisitions or greenfield projects that would have higher integration costs and long gestation periods, respectively,” Tay continues.
Further to his report, the analyst sees the lockdown in Chengdu as having little impact on IHH’s gestating Chengdu Gleneagles Hospital, given that the hospital’s operations had already been impacted by the Covid-19 pandemic since its opening in late 2019.
However, China’s zero-Covid-19 policy continues to pose a challenge to IHH’s operations in the country as private healthcare operators are unable to take in Covid -19 patients under current restrictions. This has prolonged the gestation period for Gleneagles Chengdu and could weigh on operations of Gleneagles Shanghai which is slated to open by end FY2022, he notes.
Meanwhile, Tay is more upbeat on IHH’s prospects in Hong Kong, where private hospitals can accept Covid-19 patients for treatments. IHH’s Gleneagles Hong Kong has seen improving ebitda contribution and management has guided for total operational beds to reach 300 by end-FY2022. “We believe IHH operates about 200-250 beds in Gleneagles Hong Kong currently.”
Shares in IHH closed 2 cents lower or 1.04% down at $1.91 on the SGX and at RM6.20 on the KLSE, down 1 sen or 0.16%.
