This article first appeared in The Edge Malaysia Weekly on September 9, 2024 - September 15, 2024

JAPAN’s Mitsui & Co Ltd, together with local institutional shareholders and a private equity fund, are said to be exploring an option to strengthen their grip on IHH Healthcare Bhd (KL:IHH) in a move to carve out better value for the healthcare group.

Sources say Mitsui, which holds a 32.8% stake in IHH through MBK Healthcare Management Pte Ltd, is looking to increase its shareholding to 49%. The plan, if it goes through, will see the remaining 51% in IHH held by Malaysian institutional funds as well as private equity fund CVC Capital Partners.

It is learnt that CVC is teaming up with the Employees Provident Fund (EPF) to lead the Malaysian shareholding portion in the company. At the moment, EPF has a stake of just above 11% in IHH.

Khazanah Nasional Bhd, which founded the IHH group in 2010 as a holding company for its healthcare companies, is expected to maintain its stake of 25.94%.

“The major shareholders feel that the market is undervaluing IHH, which owns and manages about 80 hospitals in 10 countries across Asia and Turkey. It has among the world’s largest healthcare network and strong cash flow.

“But the stock is undervalued. So a listing elsewhere could add to its valuations. For instance, healthcare-related stocks fetch much higher valuations in countries like India,” says one source.

Mitsui Malaysia, when contacted, declined to comment. “Mitsui has no comment on the specific asset ownership policy, and also the capital policy with regard to IHH as the publicly-traded company,” it states in an email reply.

IHH is currently listed on Bursa Malaysia, with a dual listing on the Singapore Exchange. It is trading at a historical price-earnings multiple of 21.7 times. Its regional peers such as Bangkok Dusit Medical Services and Bumrungrad Hospital PCL are trading at about 30 times historical price-earnings multiples.

Nevertheless, with its large international presence and growing fundamentals, IHH is turning out to be different from its regional peers. There are not many healthcare groups with a strong presence in Malaysia, Singapore, India and Turkey. IHH also has hospitals in Hong Kong and Shanghai.

The diversification of its operations has resulted in IHH recording strong growth in cash flow. Its earnings before interest, tax, depreciation and amortisation (Ebitda) of RM4.6 billion for the financial year ended December 2023 represents a growth of 15% over that in FY2022.

“The Ebitda is expected to grow in the next five years as the group’s bed capacity increases from the current 12,000 by more than 4,000 over the next five years,” AmResearch says in a recent report on IHH.

IHH’s strongest expansion in hospital bed capacity is in India, followed by Malaysia and Turkey. However, IHH’s strongest Ebitda contributors are its operations in Singapore and Turkey.

According to its latest annual report, IHH had net borrowings of RM7.6 billion at end-2023. With its current market capitalisation of RM57.6 billion, investment bankers estimate the company to be conservatively trading at a historical enterprise value over Ebitda (EV/Ebitda) of less than 12 times.

According to AmResearch, IHH’s EV/Ebitda is 10.8 times for the financial year ended December 2025 and 9.5 times for 2026.

“In recent times, healthcare-related transactions have been done at 20 times EV/Ebitda. Hence in relation to valuation, IHH is trading at attractive valuations,” says an investment banker.

IHH’s strong balance sheet has allowed it to expand its operations.

Its latest acquisition is the Island Hospital in Penang for which it is paying RM3.9 billion cash. According to an announcement of the purchase, the transaction values Island Hospital at a historical EV/Ebitda of 24.6 times. The deal includes a parcel of land adjacent to the hospital.

If the land were excluded, the transaction would value the 600-bed Island Hospital at an estimated 19.2 times EV/Ebitda.

In February this year, IHH completed the acquisition of Bedrock Healthcare Sdn Bhd (BHSB) for RM245 million. BHSB operates the 82-bed Timberland Medical Centre in Kuching, Sarawak. The transaction is valued at an EV/Ebitda of 12 times.

The healthcare sector is a growing business in Asia and has attracted the interest of private equity funds. For instance, TPG — together with the Hong Leong Group — has built a healthcare chain around the Columbia Asia Hospital group, while Sunway Healthcare Group has attracted GIC Pte Ltd of Singapore as an investor.

The benchmark for healthcare valuations was set in November last year when Columbia Asia Healthcare Sdn Bhd (CAHSB), which is owned by HLT Healthcare Holdings Ltd, acquired four hospitals jointly owned by Sime Darby Group and Ramsay Health Care of Australia for RM5.7 billion. The deal was valued at an EV/Ebitda of 20.1 times.

Based on an EV/Ebitda valuation of 20 times, analysts estimate that the impending listing of Sunway’s healthcare arm is valued at about RM14 billion, assuming the group expands its hospital chain from the current three facilities.

The planned listing of Sunway Group’s healthcare division follows the entry of GIC, which forked out RM750 million for a 16% stake in July 2021. The transaction valued the 800-bed healthcare division of Sunway Group at RM4.7 billion then.

According to reports, GIC’s entry into Sunway Healthcare is on the basis of the healthcare unit being listed by October 2027.

EPF is no stranger to investing in the private healthcare sector. Together with the Abu Dhabi Investment Authority (ADIA), EPF has an interest in CAHSB through One Health Holdings (OHH), a fund managed by TPG.

According to announcements, EPF and ADIA have an effective 25% stake in OHH, which owns HLT Healthcare that, in turn, controls CAHSB.

As for Mitsui, its entry into IHH can be traced to the Japanese entity’s acquisition of a 30% stake in 2011 before Khazanah listed the healthcare arm. Its equity interest dropped to just below 17% following the listing of IHH in 2012.

In 2018, Mitsui increased its holding to 32.9% through the acquisition of an additional stake of 16% from Khazanah for RM8.4 billion then. That deal propelled Mitsui to become the largest shareholder of IHH, which by then had already expanded its presence in Asia and Turkey with 12,000 beds.

In 2021, there were reports that Mitsui was exploring a proposal to take over Khazanah’s stake in IHH, paving the way for the privatisation of the healthcare group. However, Khazanah denied that it was disposing of its interest in IHH. 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.