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IHH’s Prince Court purchase depends on turnaround
Khairul Khalid 
Prince Court Medical Centre is being sold as part of Petronas' consolidation efforts
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Khazanah Nasional Bhd’s purchase of Prince Court Medical Centre Sdn Bhd will boost the sovereign wealth fund’s burgeoning healthcare portfolio as it looks to add it to the stable of hospitals under its public-listed vehicle, IHH Healthcare Bhd.

Though the deal will provide IHH with first option to purchase the Petronas-owned hospital from another Khazanah subsidiary, it is uncertain whether IHH will do so under the current circumstances.

An industry analyst tells FocusM that Khazanah’s primary concern in the short-term is to turn around Prince Court before IHH would consider exercising that option.

“It has been losing money since its inception and it would be sensible to steer it to good financial health first before integrating it into IHH’s portfolio. IHH certainly has the expertise and resources to turn around Prince Court.

“How long will it take? That remains to be seen,” says the analyst. 

IHH’s main brands are Pantai, Mount Elizabeth, Gleneagles, Parkway and Acibadem

Narrowing losses

For the five financial years since 2012, Prince Court has been in the red although it has seen steady improvement. Revenue has climbed and losses have narrowed sharply over the years.

For the year ended Dec 31, 2016 (FY16), the company posted a loss after tax of RM4 mil, down 95% year-on-year. Revenue was also higher in FY16 at RM211.29 mil, up 12.5%.

A RHB Research report says Khazanah (via IHH) will target to turn around Prince Court in the immediate term due to the hospital’s financial predicament.

“(Prince Court) has been loss-making, and would have weighed on IHH’s earnings in the near- to mid-term had it been directly acquired.

“We expect IHH to charge advisory fees in the interim for the collaboration and would not rule out the possibility that it could eventually acquire Prince Court. We continue to like IHH for its strong regional footprint and longer-term earnings growth potential,” says RHB.

It also states that the key risks in the deal include overpaying for acquisitions in IHH’s quest for market access and growth, as well as changes in regulatory policies.

On March 22, Khazanah announced the deal to buy Prince Court from Petronas’ wholly-owned unit, Petronas Hartabina Sdn Bhd, at a price to be determined by June.

The move is part of Petronas’ ongoing consolidation efforts which include disposal of non-core businesses and assets. The disposal is expected to be completed by the second quarter.

Prince Court is a 270-bed private hospital located within Kuala Lumpur City Centre. It began operations in 2007 to cater for residents within the catchment as well as Petronas’ top executives. Petronas built the hospital at an estimated cost of RM544 mil.

Concurrently, IHH also entered into a term sheet for a collaboration agreement with Khazanah’s wholly-owned subsidiary Pulau Memutik Ventures Sdn Bhd. The latter owns 40.9% of IHH.

The collaboration includes shared services support and operational improvement initiatives for Prince Court. IHH will also be given a right of first offer to acquire the hospital during a pre-agreed period.

 

Economies of scale

With over 10,000 beds currently in its portfolio, IHH will certainly improve its economies of scale with the Prince Court deal.

According to Affin Hwang Capital Research, the size advantage for expanding hospitals includes material procurement and attracting talent.

“They (the hospitals) are able to enjoy lower material costs due to their large purchase quantities. With higher patient visitations, they are also able to entice doctors to practise with them to earn more consultation fees.”

The report also states that although private hospitals have been struggling with lower patient admissions in the last two years, they are starting to see signs of recovery, which could be sustained due to several long-term drivers such as an ageing population, rising income per capita and an increase in insurance coverage.

According to the population and housing census, those above 65 years old accounted for 6.2% of the total population in 2016 compared to 5% in 2010. The figure is expected to rise to 7% by 2020.

Total health expenditure per capita increased at a compound annual growth rate (CAGR) of 8% to US$450 (RM1,327) between 2009 and 2014 and one of the main drivers of growth is the rise of the affluent class in the country.

The Life Insurance Association of Malaysia’s (LIAM) annual report states that medical claim benefits increased by 8% year-on-year to RM3.41 bil and the number of policies increased by 100,000 to 12.6 million in 2016.

 

Far-flung reach

Growing awareness of the importance of insurance and reduced reliance on out-of-pocket spending will underpin the growth of the private healthcare sector.

IHH provides premium healthcare services in Malaysia, Singapore, Turkey and India, with a growing presence in China and an expanding network across Asia, Central and Eastern Europe, the Middle East and North Africa.

The group comprises leading healthcare brands such as Mount Elizabeth, Gleneagles, Pantai, Parkway and Acibadem.

IHH was established in 2010, following the acquisition of Singapore’s Parkway Group and Malaysia’s Pantai Group. In 2012, it acquired Acibadem Holdings Group in Turkey and went for dual listing on the main markets of Bursa Malaysia and Singapore Exchange.

IHH’s business units collectively operate more than 10,000 licensed beds in 50 hospitals as well as medical centres, clinics and ancillary healthcare businesses in 10 countries. It also has close to 2,000 new beds in the pipeline to be delivered through new hospital developments and expansion of existing facilities.

Public hospitals’ pain, private healthcare’s gain

The mushrooming of private hospitals in the past decade has provided intense competition in the industry and some market observers are concerned it may reach saturation point soon.

Nevertheless, a key factor in the growth of private hospitals is the lack of expansion of public hospitals and until that is addressed, companies such as IHH Healthcare Bhd will continue to grow and benefit.

“We have not seen a significant increase in the number of public hospitals and operating beds for the past few years. We believe a major expansion in public sector facilities is unlikely, given the development budget allocated for public healthcare has not seen a significant increase for years,” says Affin Hwang Capital Research.

Based on the current number of hospital beds, it is believed that Malaysia still has room for hospital expansion without inducing intense competition.

Based on estimates by the World Health Organisation (WHO), the average number of hospital beds (public and private) is around 19 per 10,000 people in Malaysia, which is still below the global average of 26 per 10,000.

At the state level, there is much potential for further market penetration by private healthcare companies.

“We see that at least nine states’ bed density is below the country’s average, most of which range from 1.1-1.6 hospital beds per 1,000 population. This shows private healthcare investment is still much needed to support growing healthcare demand in Malaysia.

“Although Kuala Lumpur, Penang and Perak have 2.7-3.7 hospital beds per 1,000 (above country average of 1.9), we are still comfortable with the density levels. Nevertheless, further expansion in these regions may lead to competition risks in the future,” says Affin Hwang Capital.

Likewise, the number of IHH’s operating beds in the country is expected to grow by 7%. While it does not have major greenfield projects in Malaysia due to its focus on overseas expansion (such as China and Turkey), the research house is expecting its existing hospitals to increase operating beds, especially the new ones such as Gleneagles Medini, Gleneagles Kota Kinabalu, and Pantai Hospital Manjung.

Investors in the healthcare sector are also concerned about the risk of rising competition with the increasing number of private hospitals.

One factor contributing to the decline in private hospitals’ market share is the fact that more patients have sought treatment in public hospitals. This could be related to cost cutting measures by customers due to the economic uncertainties in the last few years.

Rising medical costs have also deterred the growth of patient admissions in the private sector. New private hospital openings may pose competition risks which reduce the attractiveness of the healthcare sector in the long run. However, the statistics show the sector as a whole is experiencing stable growth.

“Based on the 2016 data released by the Ministry of Health recently, the total number of hospitals (both private and public) has grown at a compound annual growth rate (CAGR) of 3% from 2010 to 2016.

“We think this growth rate is reasonable compared to the 3.2% CAGR in inpatient admissions over the same period nationwide,” says Affin Hwang Capital.



This article first appeared in Focus Malaysia Issue 278.