SINGAPORE (Jan 8): Rowsley’s announcement in July last year that it would morph into a healthcare company has kept its stock trading heavily — and at rather rich valuations — for several months.
Shortly before Rowsley called for a trading halt on July 17, the counter was trading at a low of 6.6 cents. When trading resumed on July 19, Rowsley’s market value had more than doubled and continued to rise until it hit a high of 19.8 cents on July 20. Enthusiasm for the stock then abated, only to see another sharp uptick on Dec 18, when Rowsley effectively confirmed the backdoor listing of Thomson Medical Group, as the counter will be renamed.
To be sure, the healthcare sector has been one of the most resilient, thriving even through financial meltdowns and economic stagnation. Hospitals are still running at near-full capacity, and demand for private healthcare services is forecast to keep rising from increasingly affluent — and ageing — populations in the region. In the past couple of years, healthcare-related stocks were among the best performers on the stock exchange. The SGX All Healthcare Index, which comprises 30 companies from medical equipment manufacturers such as Top Glove to hospital operator Raffles Medical Group and real estate investment trust Parkway Life REIT, outperformed broader benchmarks in the region.
The sentiment is in turn attracting even more players into the market. In 2016, there were the successful IPO of endoscopist HC Surgical Specialists and the near-listing of Fullerton Healthcare, which operates a chain of outpatient clinics and acts as a third-party administrator for doctors and insurers.
Most recently, on Jan 3, 2018, Perennial Real Estate Holdings announced it was setting up its first joint venture, Perennial HC Holdings, to invest in and develop large-scale, healthcare-based integrated developments in China. In a statement to the exchange, Perennial says the US$1.2 billion ($1.6 billion) venture will focus on projects connected to high-speed railway stations. Perennial will hold a 45% stake in the JV. The other partners are Bangkok Bank Public Co, subsidiaries of Shun Tak Holdings, BreadTalk Group and Wilmar International, as well as Wilmar CEO Kuok Khoon Hong.
Health is wealth
Rowsley, whose single, largest shareholder is billionaire, former stockbroker Peter Lim, is currently in the real estate investment and consultancy business, a result of acquiring RSP Architects Planners & Engineers in 2012. It also has stakes in hospitality assets in the UK. When concerns over an oversupply of private residential property arose in Johor, Rowsley modified its 9.23ha site slated for the Vantage Bay project to focus on healthcare.
Yet, the company’s earnings have been lumpy at best, with losses in three out of the past five years, and the market had been uninspired about its stock. Trading volumes were thin and the stock was sliding into oblivion until the company’s announcement on July 18 last year.
At that time, Rowsley said it was acquiring 100% of Sasteria, a private company wholly-controlled by Lim. Sasteria owns Thomson Medical Centre, the 190-bed hospital and medical centre specialising in maternity care and fertility treatments. Thomson Medical was listed on the Singapore Exchange before Lim took it private in 2011. Under the deal, Sasteria would also hold 70.36% of TMC Life Sciences, a Bursa Malaysia-listed company that operates the 200-bed Tropicana Medical Centre private hospital in Kuala Lumpur.
In its statement then, Rowsley said it would pay $1.9 billion for Sasteria by issuing 25.3 billion new shares at 7.5 cents each. That would have been 2.7% higher than Rowsley’s last-traded price of 7.3 cents prior to the announcement, but 13% less than its net asset value then of 8.63 cents a share. At the same time, existing shareholders would also receive two bonus warrants for every share they held. The bonus warrants have an exercise price of nine cents, and each comes with a “piggyback” warrant with an exercise price of 12 cents.
Lim owns more than 45% of Rowsley, and his stake will rise to more than 90% once the new shares are issued. He is seeking a waiver of the obligation to make a mandatory offer for the company.
Since then, however, Rowsley has adjusted the value of the deal from $1.9 billion to $1.6 billion through the issue of 21.3 billion new Rowsley shares, still at 7.5 cents each. At a briefing on Dec 18, Rowsley CEO Tan Wee Tuck explained that the consideration dropped because “additional acquisitions” that were to be part of the deal announced in July “did not take place in time for us to close it this time around”.
In fact, Tan attributed the delay in the signing of the deal, which was to have taken place sometime in September last year, going by the two-month timeframe the company had announced, partly to Rowsley’s attempt then to secure the additional acquisitions. He declined to give further details, saying the potential acquisitions were still in play. “In July, we did not disclose details of the additional acquisitions we were pursuing,” he said. “It’s not appropriate for us to share what targets we are going after, simply because they are commercially sensitive and those deals are being kept alive.
“We are certainly focused on growing the group through acquisition in the future.”
Under the deal announced last July, it was stated that Sasteria would have two assets — TMC Life Sciences and Thomson Medical — and was also evaluating a possible acquisition of one or more medical practices. TMC Life Sciences had a market capitalisation of about RM1.38 billion ($457.36 million) then, which would have put the value of Sasteria’s 70.36% stake at RM971.2 million. Consequently, Thomson Medical would have been valued at roughly $1.6 billion.
On the face of it, these valuations seemed high. In 2011, Thomson Medical was privatised at $1.75 a share, giving it a value of $513 million, or 32 times its earnings for the financial year to August 2010. To be sure, its revenue and earnings have grown significantly since then. For FY2010, it reported a net profit of $16.25 million on the back of $81.68 million in revenue. According to filings with the Accounting and Corporate Regulatory Authority, Thomson Medical’s FY2016 earnings were $30.2 million, on revenue of $151.3 million. As at Aug 31, 2016, the company had total assets of $275.1 million and total liabilities of $35.3 million. Based on these numbers, at a valuation of $1.6 billion, Rowsley would then have been paying more than 50 times historical earnings for Thomson Medical.
Under revised terms, and adjusting for TMC Life Sciences’ market capitalisation having risen to RM1.47 billion, as well as the stronger ringgit, Rowsley is now effectively acquiring Thomson Medical at a valuation of $1.26 billion. This is equivalent to about 42 times historical earnings.
A good deal?
That is not a low valuation compared with the broad market, but it is not entirely out of line with valuations within the healthcare sector either. TMC Life Sciences itself is trading at some 56 times earnings in Malaysia. Among the Singapore-listed healthcare stocks, IHH Healthcare, which operates the Parkway private hospitals and medical centres here as well as hospitals in other countries, trades at 70 times forward earnings. HC Surgical is also riding high, up about 15% from a year ago and trading at 67 times earnings. Singapore Medical Group, which has been aggressively acquiring specialist clinics in various disciplines, is up 25% from a year ago and trades at 35 times earnings. Health Management International, which owns and operates two hospitals in Malaysia, trades at 55 times earnings, and 28 times forward.
A couple of players do seem to have fallen out of favour, though. Shares in Singapore O&G, a chain of women’s health specialist clinics, have declined 40% from their peak in May last year to trade at 25 times estimated FY2017 earnings. Raffles Medical, down 25% from a year ago, trades at 28 times estimated FY2017 earnings.
However, even if Rowsley is now acquiring Thomson Medical at a more attractive price, investors should keep in mind that shares in Rowsley are still currently trading well above the 7.5-cent price at which the new shares will be issued to the vendor of Sasteria. Based on its current share price of 13 cents, Rowsley will have a market value of $3.39 billion once all the new shares are issued (before the conversion of any warrants). Prior to the announcement of the acquisition of Sasteria, Rowsley had a market value of only $346 million.
So, it would appear that the market is currently putting a value of roughly $3 billion on Sasteria. Subtracting 70.36% of TMC Life Science’s market capitalisation from this figure leaves $2.7 billion attributable to Thomson Medical. That is equivalent to 89 times Thomson Medical’s historical earnings.
Opportunities and risks
The healthcare story at Rowsley is not just limited to Thomson Medical and TMC Life Sciences, though. Rowsley is also developing the Thomson Iskandar Medical Hub, which is targeted for completion in 2021. This property will have 500 beds, 400 medical suites and retail space. It sits next to Rowsley’s Vantage Bay Healthcare City development, which is to comprise a specialist hospital, a community hospital and long-term care facilities as well as research and training institutions and retail services.
According to some consultants, Malaysia is primed to ride a boom in healthcare. Apart from rising domestic demand, the country is seeing more medical tourists from neighbouring countries. The Malaysian Healthcare Travel Council says medical tourism in the country has grown at double-digit rates annually since 2011. Malaysia is reported to have received more than 900,000 medical tourists in 2016, compared with the roughly half a million who sought treatment in Singapore. These tourists are said to have contributed as much as RM5 billion to the Malaysian economy.
Still, investors in Rowsley face execution risks with this project. Meanwhile, Rowsley’s directors have also said that healthcare will be the group’s main business after the acquisition of Sasteria. As for what will happen with the company’s existing businesses in real estate and hospitality, Rowsley chairman Ng Ser Miang would only say that the company “will be taking a strategic look” after the deal has gone through. It remains to be seen if Rowsley will get an attractive price for its non-healthcare assets in the event they are sold.
Rowsley shareholders will vote on the deal to acquire Sasteria at an extraordinary general meeting to be held this quarter.
