Near-term earnings impact on IHH seen minimal

Prince Court to contribute to 2% of IHH’S core net profit

PETALING JAYA: IHH Healthcare Bhd’s purchase of Prince Court Medical Centre Sdn Bhd for Rm1.02bil is expected to have minimal impact on its earnings growth in the near term due to financing cost, analysts said.

On Tuesday, IHH announced its plan to buy the Prince Court hospital for Rm1.02bil cash from sovereign wealth fund Khazanah Nasional Bhd.

Notably, the deal was cheaper than what Khazanah paid a year earlier to Petroliam Nasional Bhd (Petronas) at Rm1.086bil for Prince Court.

“While we are positive on the proposed acquisition... the contribution from the acquisition is expected to be minimal in the near term after taking into account the financing cost for the acquisition,” said Affinhwang Capital in a report yesterday.

This is despite Prince Court being a debtfree profitable hospital churning about Rm260mil revenue, Rm44mil EBITDA and Rm51mil net profit in FY18.

However, the amount is only about 2% of IHH group’s core net profit.

The research house pointed out that IHH is working on funding 64% or about Rm650mil of the Prince Court acquisition with bank borrowings, which would raise its gearing level to 0.51 times from 0.48 times.

“Based on an indicative interest rate of 4.13% on the borrowing of Rm650mil, the interest expense for the acquisition is estimated to be Rm26.8mil, which is slightly above Prince Court’s FY18 core net profit of Rm26mil,” Affinhwang said.

In terms of valuation, TA Securities Research said the acquisition is fair at an FY18 price-earnings ratio (PE) of about 20 times, in comparison to the listed healthcare providers at an average of 54.5 times PE.

The research house said it is “neutral” on the proposed acquisition despite having the view that the acquisition will allow IHH to further strengthen its position in the Klang Valley region against other competitors.

It has maintained its “sell” call on IHH shares.

“We expect competition to be more intense given the recent opening of Sunway Velocity Hospital of 240 total beds in phase one and it’s close proximity with Prince Court.

“In addition, we believe IHH Gleneagles KL (372 beds) also located close to PCMC (3.4km via car) is not operating at full occupancy rate,” it said in a report yesterday.

Meanwhile, MIDF Research said the acquisition was in line with IHH’S goal to become the leading premium healthcare service provider in Malaysia and expand its business in Malaysia.

“With solid financials and a clear business strategy, we believe that Prince Court is on the right track to become a leading healthcare provider regionally.

“Hence, we opine that this potential acquisition could be earning-accretive for IHH in the future,” it said.

However, it expected Prince Court to contribute only 2.6% to IHH’S net profit for the financial year 2020.

The research house pointed out that the risk to its earnings forecast includes delay in the completion of the deal, lower-than-expected inpatient admissions and revenue per patient and increasing in cost of operations.

MIDF maintained its “buy” call on IHH on the back of the growth for healthcare services across all IHH’S home markets and resilient demand.

Shares of IHH closed six sen higher at

RM5.75 apiece yesterday.