Analysts positive on IHH Healthcare’s plan to divest medical education arm

KUALA LUMPUR (June 8): Analysts are positive on IHH Healthcare Bhd’s plan to divest its medical education arm, IMU Health Sdn Bhd, for an enterprise value of RM1.35 billion, as the move will enable the company to dispose of its core non-assets at a relatively attractive valuation and further strengthen its core hospital business.

The group reached an agreement on Tuesday June 7 with Inbound Education Holdings to sell 100% of its stake, or 1.14 million shares, in IMU. Under the agreement, IMU will also sell IMU Education (IMUE), which is still under construction, to Columbia Asia Sdn Bhd. The consortium of investors is led by The Rise Fund (founded by TPG) and Hong Leong Group.

IMU controls 100% of the share capital of IMUE, IMC Education, IMU Healthcare and 60% of the shares of IMU Dialysis.

Although IHH has lost its education arm, MIDF Investment Bank Bhd believes that the significant gain from the sale of IMU to the investor consortium will benefit IHH in the long run as it continues to focus on its hospitals, medical operations and equipment, research and diagnostics, and digital health.

“We continue to view IHH positively for its comprehensive expansion and growth plans, as well as its strong and focused balance sheet. Overall, we maintain our ‘buy’ call with a target price (TP) unchanged from RM7.96 per share on IHH,” he said in a note on Wednesday (June 8).

In addition, the MIDF stated that the divestiture of IMU is not expected to result in a material decline in IHH’s financial performance. “In FY21, the division only contributed approximately 1% of total revenue and 3% of total profit. Therefore, we are not making any changes at this stage to our guidance. We believe the HHI is moving within our trajectory range,” the research house said.

Meanwhile, Hong Leong Investment Bank (HLIB) Research, which maintained its “buy” call for IHH with a TP of RM7.75, said the selloff was not entirely a surprise.

“We are positive on this development as the enterprise value of RM1.345 billion implies an EV/EBITDA multiple of 16.6x (based on IMU’s Adjusted EBITDA of RM81.4 million during FY21), representing an 80% premium to SEGI.EV/EBITDA of 9.2x.

“After the divestiture, IHH will cease consolidating the results of IMU. IMU represents [about] 1.4% of our revenue guidance for FY22-24f and we note that the segment provided a consistent contribution to earnings from [about] RM55 million to the group in recent years (excluding FY20). Thus, we estimate a revenue loss of [about] 3% for FY23-24f, once the transaction is concluded. Assuming all cash proceeds received (RM1.346 billion) are used to repay debts, [the] the leverage ratio will also decline from 0.21x in 1QFY22 to 0.16x,” HLIB said.

Kenanga Research, on the other hand, reiterated its “market performance” rating for IHH with a TP of RM6.65.

Based on Kenanga’s back-of-the-envelope calculation, if the divestment materializes, his TP for the stock is expected to increase by 1.5%.

As of this writing on Wednesday, IHH’s share price is up five sen or 0.77% to RM6.55, translating to a market value of RM57.66 billion. .

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