Robust valuation lays path for Sunway’s healthcare arm’s eventual IPO

SUNWAY Bhd’s sale of a 16% stake in its healthcare arm Sunway Healthcare Group (SHG) to Singapore’s sovereign wealth fund GIC (Ventures) Pte Ltd will provide better clarity for SHG’s expansion visibility and initial public offering (IPO) timeline.

Essentially, the deal for RM750 mil cash in order to finance its RM2.5 bil healthcare capex for the next three to four years entails five tranches with full disbursements to be completed by end-2024.

Nevertheless, the proposed deal requires the approval of 51% of Sunway’s shareholders and consent from the Ministry of Health (MOH).

Interestingly, the deal values the entire healthcare unit at a robust RM4.7 bil which implies a 31 times 2020 EV/EBITDA (enterprise value/ earnings before interest, taxes, depreciation, and amortization) for SHG that is higher than its Malaysian hospital peers’ 14-19 times.

“Importantly, the implied equity value per bed for SHG at 6.3 times which is also higher than IHH Healthcare Bhd’s Prince Court acquisition at 3.7 times and KPJ Healthcare Bhd at 1.3 times,” wrote Chloe Tan Jie Ying in a company update.

Henceforth, the transaction will pave the way for SHG’s IPO which boasts a RM10 bil valuation earliest by 2027.

“Through the stake sale, Sunway agreed to provide GIC with a minimum 12.5% IRR (internal rate of return) (including a dividend yield of 3% per annum) with the IPO as GIC’s exit strategy, and a punitive 18.5% IRR should the SHG fail to list.

“This lays out the timing for SHG’s IPO in six to seven years, and SHG’s expansion plan to grow its bed capacity to 3,000 beds across eight hospitals in the medium term from 740 currently,” opined UOB Kay Hian Research.

“Based on the management’s projection of (i) revenue/bed exceeding RM1 mil per annum; (ii) bed occupancy rate of 75-80%, and (iii) EBITDA margin of about 25% would pave the way for SHG to be valued at more than RM10 bil based on EV/EBITDA multiples of 15-20 times).”

According to UOB Kay Hian Research, due to accounting reclassification, SHG is reclassified as joint control by Sunway (as opposed to wholly-owned subsidiary) as GIC will participate in the decision-making process.

“Sunway is expected to record a one-off gain of RM2.3 bil arising from the dilution of its equity stake assuming the deal is successful,” projected the research house.

“The RM2.3 bil was derived from the pre-money valuation of RM4.0 bil that subtracted SHG’s net tangible assets of RM1.4 bil and a derivative liability of RM300 mil.”

This would also see net gearing reduced from 0.51 times to 0.42 times while providing more headroom for SHG to fund its capex.

At the close of today’s morning session, Sunway was down 5 sen or 2.81% to RM1.73 with 9.14 million shares traded, thus valuing the company at RM8.54 bil. – June 24, 2021

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