This article first appeared in The Edge Malaysia Weekly on March 28, 2022 - April 3, 2022

IHH Healthcare Bhd’s recent offer of RM5.67 billion (US$1.35 billion) to acquire Ramsay Sime Darby Health Care Sdn Bhd (RSDH) has put KPJ Healthcare Bhd in the spotlight as its stock looks undervalued compared with its peers.

KPJ Healthcare’s share price had fallen 3.8% year to date to close at RM1.02 last Friday, valuing the group at RM4.6 billion. Bloomberg data showed that the stock was trading at a one-year forward price-earnings ratio (PER) of 30.91 times.

Meanwhile, IHH had a forward PER of 35.43 times. Its share price closed at RM6.52 last Friday, giving the group a market capitalisation of RM57.4 billion.

Based on IHH’s offer for RSDH, which had 1,375 operational beds as at last Tuesday, the joint venture between Ramsay Healthcare Ltd — one of the world’s largest hospital operators — and Sime Darby Bhd was valued at about RM4.12 million, or about US$1 million, per operational bed.

Using this metric, KPJ Healthcare — which has a total of 3,410 operational beds in Malaysia, Indonesia and Bangladesh — is estimated to be valued at about RM14 billion.

While RSDH owns and operates seven hospitals in Malaysia and Indonesia and a day surgery facility in Hong Kong, KPJ Healthcare’s assets in Malaysia include 28 hospitals, an ambulatory care centre, a university college and four senior and assisted living care facilities. The 29th hospital for the group — KPJ Damansara 2 — is expected to be ready by early this year.

KPJ Healthcare also operates two hospitals in Indonesia and one each in Thailand and Bangladesh, as well as a nursing college in Bangladesh and a senior and assisted living care centre in Australia.

It is clear that KPJ Healthcare is several times bigger than RSDH. However, is it more profitable than the latter?

In the financial year ended Dec 31, 2021 (FY2021), KPJ Healthcare reported RM2.63 billion in revenue and RM248.35 million in profit before interest and tax (PBIT). Based on the 3,410 operating beds, that translates into revenue of about RM770,000 and PBIT of RM72,830 per bed.

Meanwhile, the revenue and PBIT of Sime Darby’s healthcare segment in the financial year ended June 30, 2021 (FY2021) came in at RM1.055 billion and RM122 million respectively.

RSDH has 1,577 beds in its hospitals in Malaysia and Indonesia. The numbers translate into revenue of about RM670,000 and PBIT of RM77,000 per bed. This shows that RSDH is only slightly more profitable than KPJ Healthcare on a per bed basis, by around 5.7%.

However, note that the numbers for KPJ Healthcare include its education arm, lab services, eye specialist operations and senior and assisted living centres. This means the revenue and PBIT per bed of its hospital operations could actually be lower.

Based on IHH’s offer price for RSDH and the group’s FY2021 PBIT of RM122 million, RSDH is valued at 46.5 times its FY2021 earnings before interest and tax.

Hong Leong Investment Bank Research has assigned a target price (TP) of RM1.34 on KPJ Healthcare, based on an FY2021 PER of 30 times. Its analyst Sophie Chua Siu Li says the healthcare group’s business activities are expected to continue gaining momentum and bring its recovery closer to pre-Covid-19 levels.

“Its strategy to selectively expand in high-demand locations and gradual price revisions also bode well for the group’s overall recovery as we emerge from the pandemic. We make no changes to our earnings forecast,” Chua says in a Feb 22 report.

“We reiterate our ‘buy’ rating on KPJ Healthcare with a TP of RM1.34, as we anticipate more meaningful recovery in patient footfall and revenue intensity following the easing of pandemic restrictions and potential reopening of borders.”

Meanwhile, in a rating rationale report on Johor Corp (JCorp) published on March 11, RAM Rating Services Bhd says JCorp’s plan to refinance its existing bank borrowings with sukuk issuances will allow the group to unlock an estimated RM1.5 billion of assets (mostly KPJ Healthcare shares) that are currently pledged against the borrowings.

JCorp is the largest shareholder of KPJ Healthcare, with a direct stake of 35.7%, while its Islamic trust Waqaf An-Nur Corp Bhd is a substantial shareholder with 7.1% equity interest.

If KPJ Healthcare were valued at 45 times its PBIT (on par with RSDH), it would be valued at RM11.18 billion. The 35.7% stake held by JCorp would be worth about RM4 billion.

To recap, IHH announced on March 22 that a confidential, conditional, non-binding, indicative proposal to acquire 100% of RSDH had been submitted to Ramsay and Sime Darby. The two companies have agreed to a period of exclusivity to allow IHH to conduct due diligence and negotiate a sale and purchase agreement.

The discussions between IHH, Ramsay and Sime Darby are preliminary and no agreement has been reached in relation to the indicative proposal. There is no guarantee that an agreement will be reached in respect of the proposal or that a transaction will eventuate.

Sime Darby sees healthcare as a core business of the group. It plans to accelerate the growth of the division by enlarging its footprint in Malaysia and Indonesia before entering other countries in Southeast Asia.

In April 2021, RSDH acquired a 100% stake in Manipal Hospitals Klang (now known as Bukit Tinggi Medical Centre) for RM370 million. It was the largest acquisition made by the joint venture since its inception in June 2013.

On the acquisition of Manipal Hospitals Klang, Sime Darby group CEO Datuk Jefri Salim Davidson said the acquisition was in line with the group’s aspiration to expand its healthcare division as a core business.

“We remain bullish on the private healthcare space in Southeast Asia, where demand for premium quality healthcare is on the rise, driven by a multitude of structural megatrends, including rising affluence, expanding and ageing populations, prevalence of chronic illnesses and greater health awareness,” he said in Sime Darby’s 2021 annual report.

“With the tremendous potential that the healthcare sector has to offer, Sime Darby will continue to grow the healthcare business. It also helps to rebalance the group’s portfolio by shielding the group from the cyclical nature of the industrial and motors businesses while increasing the group’s recurring income profile.”

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