Monday, July 23, 2012

IHH ... Jul12

Its Fair Price: 2.98 (PBB), 3.00 (JF Apex), 3.33 (TA)
 
It is sitting on a profit of rm5.5 billion as group goes public. Khazanah paid almost rm8 billion take Parkway Holdings Ltd private.  The bulk of the rm5.5 billion comes in the form of Khazanah’s 47% stake or 3.85 billion shares in IHH Healthcare Bhd post listing that comes to rm4.9 billion. Its average cost per share is rm1.58 while the IHH IPO price is rm2.85 per share. The balance of the gain comes from Khazanah’s divestment of a portion of is stake to Mitsui Co Ltd of Japan in Feb 2011 and the sale of 60% stake in Pantai Holdings to IHH.
 
Khazanah’s outlay for taking Parkway private was close to rm7.5 billion. Now (July 2012) it is sitting on a gain of rm5.5 billion, part of which is already realized.
 
Khazanah took Parkway off the market in 2010 after paying S$3.5 billion (rm8.6 billion) for the 76.1% stake it did not own. It fought a tough batter against Fortis Healthcare group in Singapore .
 
Khazanah took out the concession assets in Pantai and injected the remaining 60% stake into IHH. It also injected 100% of IMU and 13% in Apollo Hospital Group of India into IHH.
 
In Feb 2011, Khazanah divested 30% stake of IHH to Japan Mitsui Co Ltd. Mitsui paid rm3.3 billion for its stake. IHH’s shares were valued at rm2 in the deal. Out of the proceeds of mr3.3 billion, rm1.3 billion went to Khazanah, which made a profit of more than rm250 million from the deal.
 
IHH now (July 2012) includes the company’s acquisition of a 75% stake in Acibadem for rm3.7 billion. Acbadem is Turkey ’s largest private healthcare provider, with a network of 14 hospitals across Turkey and Macedonia . Abraaj Capital, which sold the stake in Acibadem to IHH, was provided a 7.02% stake in the latter.
 
Utilization Of IPO Proceeds …
 
IHH is offering 52 million shares or 0.65% of the enlarged share capital to Singaporeans at S$1.18 per share and 161.14 million shares or 2% to the Malaysian public.
 
IHH’s IPO will generate some rm5.13 billion in cash. The group will allocate a lion’s share of the proceeds to reduce its whopping debts in order to strengthen its balance sheet for future acquisition.
 
With the cash in hand, IHH will be able to slash its net debt to rm1.38 billion from rm6.04 billion which will reduce its gearing to 2.8 times from current (July 2012) 7.8 times.
 
Its total debt stood at around $2.4 billion as of the end of March 2012.
 
IHH had chosen not to commit to a dividend policy although it is generating cash flow of rm1 billion a year. However the group will pay dividends when appropriate.
 
After netting off the cost of IPO, IHH will receive about rm4.94 billion cash from the listing exercise, of which 90.9% will be used to pay off debts. Most of the proceeds will pay off a rm3.71 billion debt for financing the privatization of the Parkway group in 2010.
About 75% of its planned capex of rm6.9 billion has been paid for the period between 2010 to 2015.
 
Its Growth …
 
Parkway is one of Asia’s largest private healthcare providers and operates in Singapore , Malaysia , China , Hong Kong , India , Vietnam and Brunei . It earns more than half of its revenue in Singapore , where it is the largest private hospital provider with 43.9% market share.
 
Currently IHH’s Singapore operations have one of the highest margins and contribute about 28% to group revenue.
 
In Malaysia , Parkway is the second largest private healthcare provider with a 15.1% market share. Parkway’s expansion efforts will be focused in Malaysia , where it intends to spend rm454 million in the next few years (2012 & Beyond) to upgrade several Pantai and Gleaneagles hospitals in Penang, KL and the Klang Valley
 
IHH aims to add 3300 new beds in the next five years to the 4900 presently (July 2012). Its core healthcare operations and investments are located in Malaysia , Singapore and Turkey . This is in addition to other operations in China , India , HK, Brunei and Macedonia . The company diversified geographically only in recent years, as it was earnings all its revenue from Singapore in 2009.
 
IHHis vision is to be a pan Asian player in the healthcare arena. In fact, this has panned out as planned with the acquisition of Acibedem in addition to IHH’s foothold in India via its 11.2% stake in Apollo Hospitals Enterprise.
 
IHH will experience organic growth with the new hospitals it is building such as its Mount Elizabeth Novena hospital complex in Singapore . The first investment to roll out is the Mont Elizabeth Novena Hospital in Singapore in July 2012. The hospital cost IHH rm4.5 billion to build and more than 90% has been paid for.
 
Nevertheless, IHH is on the lookout for hospital management agreements within the region. IHH has HMAs in China , India , Vietnam and the Middle East .
 
The HMA business model allows IHH to carry on its core activity without taking on additional investment risks, and is useful in markets which the group is interested in but may not want to commit to right way. This is due to the high investments and risks involved.
 
IHH sees HAMs as one of the drivers of future growth for the group.
 
Key markets in India , China , Middle East and Vietnam are where they are looking to move the next step for the next phase of growth.
 
Its Shareholders …
 
Khazanah has decided to free the majority of the blue chips cornerstone investors in IHH’s IPO from any trading restrictions. Only investors with allocations of more than 50 million shares will be bound by a six month lock up clause.
 
Only seven of the cornerstone investors including the EPF and the KIA which collectively account for 900 million shares will not be able to sell their shares in the first six months after listing set for the end of July 2012.
 
The EPF and KIA were given the lion’s share of the cornerstone allotments with 8.95% and 6.71% shares on issue respectively.
 
Khazanah currently has a 62.14% stake in the group. The IPO will dilute Khazanah’s stake to 47.78% but create unrealized gains of rm4.90 billion based on its average cost of rm1.58 per share.
 
Khazanah will not be cashing in on IHH anytime soon. It makes up approximately 10% of Khazanah’s portfolio and will be one of the investment’s agency’s core businesses.
 
IHH next biggest shareholder is Mitsui & Co Ltd, which will have a diluted 20.48% stake post IPO.
 
IHH has reserved 62 percent of its IPO for cornerstone investors who must hold the shares for a minimum 180 days. This includes the Government of Singapore Investment Corp, Temasek Holdings Pte’s Fullerton Fund Management Co, Malaysian billionaire T. Ananda Krishnan’s Usaha Tegas Sdn Bhd, Kuwait Investment Authority, asset manager Blackrock.
 
The 22 cornerstone investors, who also include International Finance Corp, the private investment arm of the World Bank, will buy 1.39 billion of the 2.23 billion shares on offer - just over a quarter of the company - the biggest take-up by such investors of any recent major offering in the region. Up to 1.8 billion new shares in the IPO are on offer, while Abraaj Capital will sell 434.7 million shares in the dual Kuala Lumpur and Singapore listing.
 
Eastspring Investments, the asset management arm which is owned by Prudential PLC, and Malaysian pension funds have already committed to invest in the offering.
Roughly half of the remaining 720 million shares on offer will be taken up by the MITI. The rest will be offered to retail investors as well as employees and healthcare workers.
Of the 2.23 billion shares up for offer, about 400 million will be sold by existing shareholders while the rest will be new issuances.
 
Khazanah is the largest shareholder with a 62% stake while Japan ’s Mitsui & Co owns a 26.6% stake. Dubai based Abraaj Capital has 7.1% stake and Turkish hospital group Acibadem’s chief Mehmet Ali Aydinlar owns 4.2% stake.
 
Its Valuations … dated July 2012
 
Its recent acquisitions may weigh down the group’s earnings with depreciation and amortization charges. Khazanah, its major shareholder paid a premium for its healthcare assets, as high as 26 to 30 times PER. Khazanah was believed to have paid almost 40 times PER for the Singapore healthcare group. Parkway after bidding against India ’s Fortis Group.
 
Khazanah’s healthcare investment arm, IHH is set to come to market at one of the highest PER among companies making their debut on Bursa Malaysia . IHH already has 22 cornerstone investors lined up, a list of comprising a mix of local and foreign, institutional and sovereign investors.

IHH’s cornerstone offering of 1.3 billion shares comprises 62.09% of the IPO shares offerd and 17.22% of the enlarged shares capital after the listing.

Based on the cornerstone offer price of rm2.85, IHH is priced at 93 times pro forma FY2011 earnings per share of 3.05 sen. In comparison, the median PERs for healthcare operators in the Asia Pacific’s emerging markets is only 15.3 times. IHH also looks expensive compared with healthcare service providers operating in similar markets. The median PER for five of these players is 33.2 times (historical) and 26.1 times (forward).

No forecast was provided in IHH’s draft prospectus released but based on pro forma EPS of 2.04 sen for the quarter ended March 31 2012 the offer price of rm2.85 translates to a PER of 34.9 times based on annualized EPS of 8.16 sen.

IHH reported pro forma earnings of RM165 million for the 1QFY2012 ended March 31 with an annualized earnings per share of 8.16 sen and a retail offer price of rm2.85, the stock is being valued at 35 times earnings. The valuation appears high but it can be justified because of the capex that will increase IHH’s 4900 beds by 63%.
 
However, PER may not be the most suitable method to value the stock.

Healthcare providers are a peculiar breed, with some having aggressive depreciation policies for their hospital equipment and other fixed assets. IHH will be adding more than 3000 beds with the new hospitals coming onstream.
 
IHH should not be compared with some of the regional healthcare players due to differing depreciation policies. Furthermore IHH offers investors an opportunity to tap into markets where tourism healthcare is set to grow, namely Malaysia and Turkey , via its indirect 60% owned Acibadem Holdings AS.

More than 90% of the RM4.9 billion in net proceeds raised from the IPO will go paying off the capex to date (July 2012) that has been mostly funded by debt. This leave IHH with rm1.6 billion in capex for some2200 beds to be added by 2015.
 
IHH will have no problem funding the remaining capex with internally generated funds backed by a strong cash flow of about rm1 billion annually.
 
The company has also declared that it would not commit itself to a dividend policy.
 
Khazanah’s acquisition of Parkway Holdings in 2010 resulted in high levels of intangibles on IHH’s books. Due to largely to its past mergers and acquisitions, goodwill and other intangible assets represent a substantial portion of assets.

The group’s goodwill and other intangible were approximately rm11.6 billion as at March 31, 2012 on a historical combined basis, representing approximately 49.8% of its total assets and 93.6% of its consolidated total equity.
 
Goodwill arising from mergers and acquisitions account for most of the group’s intangibles and are worth some rm8.5 billion, half of which can be attributed to the Parkway Group. In total, Parkway’s intangibles are worth some rm6 billion in IHH’s books.
 
IHH has been growing its global footprint, going on an acquisition spree to capture expanding demand for healthcare services. However, almost of the funds raised will be allocated to paying off debts used to acquire its prized healthcare assets in the last two years (2010-2011).

IHH plans to use 90.9% of the rm6.37 billion raised from the IPO to pay off debts within 12 months. As at March 31, 2012 IHH had rm7.63 billion in total borrowings and net gearing of 0.49 times.

The high debt levels were pinned on the group’s aggressive expansion in the past two years (2010-2011).

The group noted that a lower gearing would give it the flexibility to expand operations locally or overseas and to raise financing as and when attractive opportunities arise.

In fact, IHH is not committed to a dividend policy to pay out a minimum amount of its earnings.

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