This article first appeared in The Edge Malaysia Weekly on June 24, 2024 - June 30, 2024

WHILE two prominent hospital operators — IHH Healthcare Bhd (KL:IHH) and Sunway Healthcare — have emerged as potential suitors for the 600-bed Island Hospital in Penang in a deal said to be worth between RM3.76 billion and RM4.7 billion, the question arises as to whether such a price is justified for a mere standalone hospital. In other words, how “hungry” are the two interested parties to get the hospital?

Sources say Island Hospital makes an Ebitda (earnings before interest, tax, depreciation and amortisation) of around RM200 million. Thus, a price tag of RM4 billion would value the hospital at a price-earnings ratio (PER) of 20 times. For comparison, IHH is currently trading at a PER of 23 times.

As the largest hospital operator in Malaysia and Singapore, IHH naturally enjoys a higher PER. It is 25.94% owned by Khazanah Nasional Bhd. This means that if Island Hospital fetches a price tag of RM4.2 billion and above, it would be premium pricing for a standalone hospital.

IHH operates in 10 countries. Apart from Gleneagles and Pantai, its portfolio includes brands such as Acibadem, Mount Elizabeth, Prince Court, Fortis and Parkway.

Healthcare players say Sunway Healthcare needs the asset more even though IHH has greater financial firepower. But as an observer quips, “Sunway needs it more but IHH needs Sunway to not get it!”

The players also say that while the valuation of the asset appears steep for a number of reasons, including an overlap of specialist services offered by numerous hospitals and the shortage of nurses, a potential investor is likely looking at future development on the land on which Island Hospital is situated.

If IHH is successful in its bid, it means the group will secure a third hospital on the island as it already operates the 360-bed Gleneagles Hospital in George Town and the 190-bed Pantai Hospital in Bayan Lepas. As for Sunway Healthcare, the healthcare arm of Sunway Bhd (KL:SUNWAY), a successful acquisition will mark its debut on the island, although it does have a 200-bed hospital on the mainland — Sunway Medical Centre Penang in Pusat Bandar Seberang Jaya, Perai.

News of the Island Hospital sale first appeared in February. The Wall Street Journal reported that buyout firm Affinity Equity Partners would start the bidding process for the hospital in April and that there had been interest from domestic, foreign and international private equity firms. It was also reported that the first round of bidding would be in mid-June. Affinity Equity owns 78.08% of the hospital while the rest is held by individuals, mostly doctors.

Affinity Equity acquired Island Hospital on June 1, 2015. A plan to dispose of the hospital in 2020 did not proceed due to the Covid-19 pandemic. It is worth noting that transactions by buyout private equity funds generally involve management buyouts and taking a controlling stake.

The purchase of Island Hospital by any party will be a win for the new owner, thanks to the combination of rising affluence, an ageing population and overall growth in medical tourism, which is giving private healthcare a boost. Moreover, Penang is considered an important medical tourism hub in Southeast Asia.

In fact, Healthcare Asia, in an article in early June, quoted Island Hospital chief of staff Lim Kooi Ling as saying that the hospital aims to capture 30% of the country’s inbound health tourist volume. Lim highlighted that the hospital welcomed 200,000 health tourists out of the more than one million health travellers to Malaysia last year.

Several healthcare players and observers tell The Edge that they believe Sunway needs the asset more than IHH, ahead of a planned listing of the Sunway healthcare arm. However, they feel that IHH has more financial muscle to purchase the hospital.

Established in 1996, Island Hospital operates two hospital blocks, located diagonally across and separated by a street. The original block, known as Macalister Wing, sits on a 3.6-acre freehold site at the corner of Jalan Macalister and Peel Avenue/Peel Highway. The newer block which opened in late 2022, known as Peel Wing, is located at the corner of Peel Avenue/Peel Highway and Jalan Pierce, occupying 6.83 acres of leasehold land. The buildings are linked by a 120m underpass.

In 2017, the Penang government leased out the 6.83-acre site to Island Hospital for the development of a RM2 billion Island Medical City project. It was reported at the time that the land was leased to the hospital for 99 years at RM156 million. The plan was for Island Medical City to add 300 beds to the hospital’s already existing 300 beds.

Yet another block, known as Pierce Wing, which will bring the total number of beds to 1,000, is on the cards. In addition, the opening of a hotel is understood to be part of the plan to cater for the medical tourism market.

Sources say that even though the hospital has a 600-bed capacity, it currently operates about 400 beds. Island Hospital has 80 full-time specialists across nine centres of excellence. It employs 1,300 healthcare workers, conducts 15,000 surgeries annually and treats 400,000 patients per year.

A search on the Companies Commission of Malaysia’s website shows that Island Hospital is wholly owned by Comprehensive Care Sdn Bhd. The company has a total of 99.51 billion shares issued, of which 17.27 billion are ordinary shares and 82.24 billion are preference shares.

Based on the number of shares held, its major shareholder is Comprehensive Care Pte Ltd, which is linked to Affinity Equity, which owns 78.08% of the hospital. The other shareholders are Island Hospital founder Mark Wee Keng Hong (16.19%), Dr Wong Twee Juat (1%) and Dr Khor Kok Seng (0.5%).

Island Hospital’s latest available financial data show that it achieved a revenue of RM383.46 million and a net profit of RM28.95 million in the financial year ended Dec 31, 2022. It had accumulated profits of RM308.1 million, total assets of RM1.13 billion and total liabilities of RM602.97 million, of which RM115.65 million were current liabilities.

“Sunway Health has been in an aggressive mode with a major expansion of its flagship operation in Sunway City — more than doubling its bed count as well as a regional expansion with new hospitals in Seberang Perai (2023), Ipoh (opening in 2024), Kota Bharu (opening in 2025) and Johor,” Etiqa Insurance and Takaful chief strategy officer Chris Eng tells The Edge.

“Their experience with the Seberang Perai hospital has been very positive and aims to cater for patients on the Penang mainland. This experience no doubt drives their interest in expanding on Penang Island itself with a potential catchment area of patients both in northern Malaysia and regionally from Indonesia, Cambodia and Laos,” he adds.

Sunway plans to add 1,852 beds via seven new hospitals and its existing facilities by 2030, taking its total bed count to 3,000. Other planned openings are slated for Damansara, Kuala Lumpur, Putrajaya, Johor, Kelantan and Sarawak. Sunway currently operates three hospitals with 1,730 beds.

“IHH is a geographically diverse healthcare provider with operations in Malaysia, Singapore, India, Hong Kong and Turkiye but its geographical footprint in Malaysia has not grown much in recent years,” Eng points out.

“Nonetheless, IHH already has exposure to Penang Island via Pantai Hospital Penang in Bayan Baru, which underwent an expansion recently. Thus, there is less urgency for IHH to acquire new hospitals on Penang Island.”

“With its more extensive operations and finances, IHH is better able to acquire the hospital, although it has less incentive to do so, given its existing operations on Penang Island.”

On the RM4 billion valuation, a healthcare expert says it depends on what it is based on. “What multiple of forward earnings was used?” she asks, adding that it is not clear if any new unique services will be offered that are different from those of other hospitals close by.

“Note that TPG has built that large cardiac centre [Northern Heart Hospital Penang], so there is a question as to whether this will have a potentially negative impact on all the other hospitals’ cardiac services and revenue streams. All Penang hospitals serve the same pool of Indonesian patients,” she points out.

It is noteworthy that Northern Heart is located 270m from Island Hospital’s Peel Wing and 1km from Gleneagles Penang. Incidentally, Northern Heart, a 56-bed hospital, commenced operations last Thursday.

The healthcare expert also questions what Island Hospital’s strategy for attracting and retaining specialist doctors is. “This would be key to extending new clinical services. [Also] how badly are they suffering from the nationwide shortage of nurses? No nurses would mean delays in opening up the additional capacity of beds,” she explains.

She believes that Sunway needs the hospital more ahead of its listing. “IHH doesn’t ‘need’ Island Hospital in the sense that it already has Gleneagles and Pantai,” she says.

A hospital operator that declined to be named says the RM4 billion price tag does seem high for just one hospital, but points out that the investor is likely looking at future development on the land. This means that apart from the purchase price, the new owner anticipates further investment being ploughed in for future developments. The hospital is in a prime location in George Town, close to Gurney Drive and Pulau Tikus.

There have been some recent developments in the country’s healthcare industry. In November, Columbia Asia Healthcare Pte Ltd bought Ramsay Sime Darby Health Care (RSDH), which is a 50:50 joint venture between Sime Darby Bhd and Australia-based Ramsay Health Care Ltd, for RM5.7 billion. RSDH operates 1,530 beds across four hospitals in Malaysia and three in Indonesia.

Subsequently, in March, The Edge reported that a streamlining of healthcare assets owned by US private equity firm TPG, its investee platform TE Asia Healthcare Partners and partner Hong Leong Group under one entity is currently in the pipeline to create a mega healthcare group with hospitals across Malaysia, Indonesia and Vietnam, with Columbia Asia as the vehicle for the consolidation.

This exercise would see six healthcare service providers in the entity’s portfolio — Columbia Asia Healthcare, RSDH, Beacon Hospital, Cardiac Vascular Sentral Kuala Lumpur (CVSKL), ALTY Orthopaedic Hospital and PJ Integrated Centre of Advanced Surgery and Oncology (Picaso). The total number of beds is expected to be around 4,275, of which 2,887 would be in Malaysia.

Meanwhile, other hospital operators that are said to be having an eye on Island Hospital are US private equity firm TPG/Columbia Asia and Indonesia-based Siloam Hospitals. According to a Reuters report last week, non-binding bids were due on June 11 and CVC Capital Partners had submitted an initial bid.

Affinity Equity’s founding chairman and managing partner Tang Kok-Yew did not respond to an email sent by The Edge seeking to confirm the names of potential buyers. Sunway too did not respond to questions sent by The Edge.

As for IHH, it told The Edge, “IHH does not comment on market speculation and will update the market if there are any material developments.”

Columbia Asia responded by saying, “We currently have no comment regarding the acquisition of Island Hospital. Our focus remains on our current operations and patient services.” 

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