Sime Darby Bhd (SIME) announced last Friday that the group’s whollyowned subsidiary Sime Darby Holdings Berhad (SDHB) and AH Holdings Health Care Pty Ltd (AHHC), a subsidiary of Ramsay Health Care Limited (Ramsay) had entered into a sale and purchase agreement with Malaysian-based private hospital chain Columbia Asia Healthcare to dispose 100% equity stake in Ramsay Sime Darby Healthcare Sdn Bhd (RSDH) for a cash consideration of RM5.7bn.

More Details

RSDH is a 50:50 JV between SIME and Ramsay. RSDH's principal activities are in the management of hospitals and the provision of healthcare-related services. It operates four hospitals in Malaysia and three hospitals in Indonesia. The disposal is expected to be completed by 3QFY24 and is subject to approval from Australia's Foreign Investment Review Board (FIRB) as set out under the Conditions precedent (CP).

The Rationale for the Disposal

The proposed disposal will enable SIME to streamline its portfolio, unlock the value of its healthcare assets, and focus on its core industrial and motor trading businesses. According to the announcement, the disposal will help pare down its borrowings arising from the UMW Acquisition and/or fund the cash outlay for the mandatory general offer (MGO) of the UMW Acquisition. Although SIME had intended to grow its healthcare business, especially after acquiring 100% ownership of Manipal Hospitals, Klang, in 2021, the attempts have been hampered by the exceedingly high valuation of Asian hospitals.

Our View

We are unsurprised by the news as various parties have shown interest in acquiring RSHD after IHH Healthcare Bhd (IHH) terminated its plan to acquire the business for RM5.67bn. The implied EV/EBITDA represented by the proposed disposal from Columbia Asia worked out to 20.1x, which is relatively high compared to other listed healthcare providers in Malaysia but comparable to some selected Southeast Asia hospital peers. Sime is expected to recognise a net disposal gain of approximately RM2.0bn for the 50% stake.

Impact

The profit contribution from RSDH to SIME is only 5% in FY23, which is relatively small to the bottom line. SIME had a RM3.1bn cash pile, and according to management, the group’s net gearing will expand to about 0.8x post-acquisition of UMW and Cavpower. The disposal proceeds will help reduce SIME’s gearing ratio and provide further borrowing headroom for the group. More importantly, we believe the value creation far exceeds the impact of earnings loss from the healthcare business. Our SOP indicates that our target price will increase by 35 sen/share, assuming a cessation of the entire healthcare operation.

Valuation

We are leaving our earnings forecast unchanged at this juncture, pending the completion of the disposal. Maintain BUY on SIME with an unchanged TP of RM2.50/share, based on the CY24 sum of parts valuation.

Source: TA Research - 14 Nov 2023