IHH Healthcare plans RM3.9 billion cash purchase of Penang’s Island Hospital, expects it to be EPS accretive in 2026

INTEGRATED healthcare provider IHH Healthcare ’s indirect wholly-owned subsidiary Pantai is proposing to fully acquire Island Hospital in Penang, Malaysia, for RM3.9 billion (S$1.17 billion) in cash, the group announced on Wednesday (Sep 4).

The deal entails Pantai acquiring the full equity interest in the hospital, comprising 20 million shares, from Comprehensive Care, a company majority controlled by private equity firm Affinity Equity Partners.

In addition to the 600-bed hospital, Island Hospital comes with vacant land for development valued at RM223.4 million.

IHH Healthcare noted that the land bank has secured approvals for future development, with a gross floor area of more than 120,000 square metres, and also has the potential to yield around 400 beds.

Excluding the value of the vacant land, the enterprise transaction implies 19.2 times 2024 earnings before interest, taxes, depreciation and amortisation.

In a media briefing, group chief financial officer Dilip Kadambi said that IHH Healthcare’s acquisition targets must add to the strengths of its hospital network in the area, have “a certain value-creation plan”, and become earnings accretive in the second year – or third at the latest. Island Hospital largely meets these requirements, he noted. “We have identified almost RM200 million worth of synergies that we can capture over the next five years and, overall, it is earnings-per-share accretive in year two itself, which is 2026.”

The equity value of Island Hospital was determined on a cash-free, debt-free basis, and on a willing-buyer, willing-seller basis.

The factors taken into consideration included recent transactions of similar hospital assets in South-east Asia, the ongoing scaling-up of Island Hospital’s operations, and the net debt of the hospital and its subsidiaries, which is estimated to be RM276.3 million as at Jun 30.

The transaction will be funded through the internally generated funds of IHH and its subsidiaries, as well as external borrowings – the respective proportions of which have yet to be finalised, said IHH Healthcare.

The funding mix will be determined after considering the group’s internal cash requirements, gearing level and interest costs.

As at Jun 30, IHH Healthcare had cash and cash equivalents of RM1.4 billion.

Synergies with current hospitals

Island Hospital is set to be IHH Healthcare’s 18th hospital in Malaysia and third in Penang, after Gleneagles Hospital Penang and Pantai Hospital Penang. After the proposed deal, the three hospitals will have more than 1,000 operational beds.

Group chief executive Prem Nair said that there will inevitably be some internal competition, but most of IHH Healthcare’s hospitals “work very well together”.

“We have clusters of hospitals (across Malaysia) and they all have their area of coverage,” he noted. “As a system, they work collaboratively. Island’s addition will add to (Penang’s) cluster significantly.”

Alongside this transaction, IHH Healthcare is expanding its bed capacity organically, with the aim of adding around 4,000 new beds in the next five years. When asked whether the Island Hospital acquisition will slow the group’s organic growth, Kadambi replied that the two are “distinct events”. “(The bed addition) is brownfield expansion, for which we definitely have the resources from our cash flow... I don’t think our brownfield expansion plans will be impacted in any way because of this acquisition,” he said.

Island Hospital has five core specialities, covering orthopaedics, general surgery, gastroenterology, cardiology and oncology. For FY2024, the hospital is expected to have more than 42,000 inpatient admissions, with the average revenue per inpatient admission at RM12,000.

Kadambi estimated that the revenue contribution of Island Hospital would be “upwards of 15 per cent”.

Dr Nair also noted that Island Hospital comes fully resourced, with around 119 resident and visiting specialists. There is capacity to add new doctors and specialists, and to ramp up its bed capacity. In addition, the acquisition is likely to extend IHH Healthcare’s leading position in medical tourism, increasing access to the Indonesian catchment area, said the group. This comes after the group said in its second-quarter earnings briefing that it is bullish on medical tourism in Malaysia, with Indonesia serving as a key source of such tourists.

Kadambi said the acquisition will “increase the medical tourism within the IHH network by two times”.

Dr Nair also noted: “With the addition of Island Hospital, you will see more than one in three medical tourists utilising the IHH group of hospitals in Malaysia.”

Media outlets had previously reported that IHH Healthcare and Malaysian healthcare player Sunway Medical Centre were among the bidders for Island Hospital.

Shares of IHH closed down 0.5 per cent or S$0.01 at S$1.91 on Wednesday, before the announcement.