SINGAPORE (April 26): CIMB likes SPH management’s active approach in diversifying its revenue streams, especially into medical care which has a stable, long-term demand backed by Singapore’s ageing population and dwindling family sizes.
“We do not rule out SPH making more healthcare-related investments,” says analyst Ngoh Yi Sin in a Wednesday report.
The comments come after SPH announced last night its first healthcare acquisition of a 100% stake in Orange Valley Healthcare (OVH) and all the registered trademarks and intellectual property (IP) rights used by OVH for $164 million.
(See also: SPH acquires nursing home operator Orange Valley for $164 mil)
Ngoh thinks the acquisition could be funded by a mix of existing cash and debt facilities, given SPH’s cash holdings of $270 million and net gearing of 26% as at end Feb 2017.
“Assuming the acquisition is completed by Aug 2017, this could lift our FY18-19F EPS estimates marginally by 2.6%,” says the analyst.
See also: Test debug host entity
Established since 1993, the OVH Group wholly owns five subsidiaries, namely Orange Valley Nursing Homes, Singapore Nutri-Diet Industries, Life-Medic Healthcare Supplies, Orange Valley 3-T Rehab and Orange Valley Properties.
SPH is acquiring OVH from private equity firm KV Asia Capital, which had acquired OVH in 2014.
Apart from operating five nursing homes and two senior activity centres located near major hospitals or housing estates with high density of senior population in Singapore, OVH also offers ancillary services like providing meals and food catering, physiotherapy and rehabilitation, as well as medical devices and healthcare supplies. It currently manages over 900 nursing home beds.
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
The total consideration of $164 million values OVH at 2.3x P/BV, based on its reported net asset value of $71 million as at 31 Mar 2017. Based on its audited FY15 net profit of $6.5 million retrieved from ACRA filings, this gives us a trailing P/E multiple of 25.2x, more expensive than that the 10-15x asset-light, pure healthcare plays in Singapore have been paying for their investments.
However, on an EBITDA level, this implies a historical multiple of 15.2x, which seems fair against the low-to-mid teens EV/EBITDA of comparable transactions, says Ngoh, as regional hospital operators currently trade at 20-25x EV/EBITDA.
“We note that as at end-FY15, OVH had a net gearing of 0.44x, and positive operating cashflow of $7.5 million.”
CIMB is maintaining its “hold” on SPH with unchanged target price of $3.36 as the stock offers FY17-19F dividend yield of 4.9%, based on 90-100% payout ratio of recurring earnings.
Shares of SPH are trading 1 cent lower at $3.44.
