Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Last Week in Event SPACE: Sing Air, JD Logistics, China Mobile, Angang/Bengang, Link Admin, Xiaomi

European Event-Driven Analyst

Jesus Rodriguez Aguilar

On 26 May, <a href="https://www.smartkarma.com/entities/ramsay-health-care-ltd" target="_blank" data-smartkarma-citation="entities:673:1" rel="noopener">Ramsay Health Care (RHC AU)</a> signed an agreement to acquire <a href="https://www.smartkarma.com/entities/spire-healthcare-group-plc" target="_blank" data-smartkarma-citation="entities:22159:1" rel="noopener">Spire Healthcare (SPI LN)</a> from Mediclinic and others. Consideration is 240p, in cash, adjustable for any dividend or capital distribution at the discretion of the bidder. Mediclinic failed to acquire Spire (at a 25% higher price back then) and is tendering its 29.9% stake.
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Consideration represents 1.9x EV/Fwd Revenue, 10.5x EV/Fwd/EBITDA and 38.9x Fwd P/E. Past acquisitions in the sector have been carried out at a median 11.7x EV/EBITDA. Premium vs. prior trading session is 24.4%.
Ramsay wants to enlarge its UK footprint, and increase the NHS mix in the merged UK operations (thus diversification of revenue as it seems difficult to grow through private payers exclusively). Margins from treatment provided on behalf of NHS are not dissimilar to those from private practice. NHS will have to deal with an increase in the waiting lists due to the pandemic. There is some mention to synergies but those will not presumably come until 2023. There are some issues regarding Ramsay's leverage, although it may need to divest some UK assets anyway to obtain the green light from the CMA.
Spire has been obtaining a ROIC of 3.3% lately, below WACC, which I conservatively estimate at 8.5% in my DCF valuation, so the business is likely to have been destroying value over the last FYs. Scale and better management may be behind the acquisition.
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On the day of the offer announcement, shares in Spire were up 52p, c. 27%, and closed at 245p, above Ramsay’s offer. Ramsay earlier closed down 0.7% on the Australian Stock Exchange. As I Finnish this Insight, Spire is trading at 247p. 
Considering the premium offered, and that Mediclinic will tender its stake, I think interloper risk is unlikely. 
As in the case of <a href="https://www.smartkarma.com/entities/udg-healthcare-plc" target="_blank" data-smartkarma-citation="entities:22193:1" rel="noopener">UDG Healthcare (UDG LN)</a> (see <a href="https://www.smartkarma.com/insights/cd-r-udg-healthcare-recommended-cash-offer" target="_blank" data-smartkarma-citation="insights:51370" rel="noopener">CD&amp;R/UDG Healthcare: Recommended Cash Offer</a> ), investors may want a premium over 24%, the shares are trading at 247p, c. 3% above the offer. Folks may have been using too high discount rates for UK listed healthcare, as there have been a number of bids lately in this sector (UDG, <a href="https://www.smartkarma.com/insights/carlyle-vectura-group-expectations-of-a-sweetened-bid" target="_blank" data-smartkarma-citation="insights:52066" rel="noopener">Carlyle/Vectura Group: Expectations of a Sweetened Bid</a>, Spire, among others).
Gross spread is a negative (2.9)%. Recommendation is long SPI LN, TP 256.5p (blended average of comps and DCF), 3.8% upside to current market levels and c. 7% above offer price. Downside risk is limited and expectations of a sweetened bid are high.

On 26 May, Ramsay Health Care (RHC AU) signed an agreement to acquire Spire Healthcare (SPI LN) from Mediclinic and others. Consideration is 240p, in cash, adjustable for any dividend or capital distribution at the discretion of the bidder. Mediclinic failed to acquire Spire (at a 25% higher price back then) and is tendering its 29.9% stake.

Consideration represents 1.9x EV/Fwd Revenue, 10.5x EV/Fwd/EBITDA and 38.9x Fwd P/E. Past acquisitions in the sector have been carried out at a median 11.7x EV/EBITDA. Premium vs. prior trading session is 24.4%.
Ramsay wants to enlarge its UK footprint, and increase the NHS mix in the merged UK operations (thus diversification of revenue as it seems difficult to grow through private payers exclusively). Margins from treatment provided on behalf of NHS are not dissimilar to those from private practice. NHS will have to deal with an increase in the waiting lists due to the pandemic. There is some mention to synergies but those will not presumably come until 2023. There are some issues regarding Ramsay's leverage, although it may need to divest some UK assets anyway to obtain the green light from the CMA.
Spire has been obtaining a ROIC of 3.3% lately, below WACC, which I conservatively estimate at 8.5% in my DCF valuation, so the business is likely to have been destroying value over the last FYs. Scale and better management may be behind the acquisition.

On the day of the offer announcement, shares in Spire were up 52p, c. 27%, and closed at 245p, above Ramsay’s offer. Ramsay earlier closed down 0.7% on the Australian Stock Exchange. As I Finnish this Insight, Spire is trading at 247p. 
Considering the premium offered, and that Mediclinic will tender its stake, I think interloper risk is unlikely. 
As in the case of UDG Healthcare (UDG LN) (see CD&amp;R/UDG Healthcare: Recommended Cash Offer ), investors may want a premium over 24%, the shares are trading at 247p, c. 3% above the offer. Folks may have been using too high discount rates for UK listed healthcare, as there have been a number of bids lately in this sector (UDG, Carlyle/Vectura Group: Expectations of a Sweetened Bid, Spire, among others).
Gross spread is a negative (2.9)%. Recommendation is long SPI LN, TP 256.5p (blended average of comps and DCF), 3.8% upside to current market levels and c. 7% above offer price. Downside risk is limited and expectations of a sweetened bid are high.

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

On 6 May 2021, Bloomberg reported that <a href="https://www.smartkarma.com/entities/mitsui-co-ltd" target="_blank" data-smartkarma-citation="entities:20799:1" rel="noopener">Mitsui &amp; Co Ltd (8031 JP)</a>, the largest shareholder with a 32.90% stake, is currently exploring a proposal to privatise <a href="https://www.smartkarma.com/entities/ihh-healthcare-bhd" target="_blank" data-smartkarma-citation="entities:876:1" rel="noopener">IHH Healthcare (IHH MK)</a>. Mitsui is aiming to partner with private equity firms and has reached out to Khazanah Nasional Berhad, the second-largest shareholder with a 26.02% stake, to acquire its stake, according to Bloomberg. Mitsui and IHH have not formally commented on the report. On the back of the report, the shares have risen 8.8% from the unaffected price of RM5.20 (5 May) to the last close price of RM5.66. IHH is listed on the Main Markets of Bursa Malaysia and the Singapore Stock Exchange. In Malaysia, the threshold for triggering a mandatory general offer (MGO) is the offeror and concert parties owning 33% or more of the voting shares. Mitsui sits just below the threshold and the acquisition of further shares from Khazanah Nasional Berhad would trigger an MGO. <div class="content-highlight">We think that report has some credibility due to Mitsui’s view that IHH is a core asset to fulfil its ambition of expanding in the largest healthcare ecosystem in Asia. Also, Mitsui has a previous working relationship with Khazanah Nasional Berhad and announced the acquisition of a 16% stake in IHH from Khazanah Nasional Berhad in November 2018. Overall, at the last close price, the downside risk is low (trading close to break price) with a good probability of upside (announcement of a formal proposal). </div>

On 6 May 2021, Bloomberg reported that Mitsui &amp; Co Ltd (8031 JP), the largest shareholder with a 32.90% stake, is currently exploring a proposal to privatise IHH Healthcare (IHH MK). Mitsui is aiming to partner with private equity firms and has reached out to Khazanah Nasional Berhad, the second-largest shareholder with a 26.02% stake, to acquire its stake, according to Bloomberg. Mitsui and IHH have not formally commented on the report. On the back of the report, the shares have risen 8.8% from the unaffected price of RM5.20 (5 May) to the last close price of RM5.66. IHH is listed on the Main Markets of Bursa Malaysia and the Singapore Stock Exchange. In Malaysia, the threshold for triggering a mandatory general offer (MGO) is the offeror and concert parties owning 33% or more of the voting shares. Mitsui sits just below the threshold and the acquisition of further shares from Khazanah Nasional Berhad would trigger an MGO. We think that report has some credibility due to Mitsui’s view that IHH is a core asset to fulfil its ambition of expanding in the largest healthcare ecosystem in Asia. Also, Mitsui has a previous working relationship with Khazanah Nasional Berhad and announced the acquisition of a 16% stake in IHH from Khazanah Nasional Berhad in November 2018. Overall, at the last close price, the downside risk is low (trading close to break price) with a good probability of upside (announcement of a formal proposal). 

IHH Healthcare’s Possible Privatisation by Mitsui

Founder

Kemp Dolliver, CFA

Cherrystone Hill Research

Equity Bottom-Up

Johor Corp, <a href="https://www.smartkarma.com/entities/kpj-healthcare-berhad" target="_blank" data-smartkarma-citation="entities:877:1" rel="noopener">KPJ Healthcare (KPJ MK)</a> 's controlling shareholder, is taking concrete steps to increase the returns on its investment in the company. First, there are a new board of directors and CEO who are placing more emphasis on capital efficiency. Second, Bloomberg reports that Johor Corp is evaluating strategic options, most likely in the form of a minority investment or other transaction that would preserve its controlling stake, as opposed to an outright sale. Either way, the increased focus on returns should drive a re-rating of the shares' EV/EBITDA multiple from 10-12x currently to ~15x.

Johor Corp, KPJ Healthcare (KPJ MK) 's controlling shareholder, is taking concrete steps to increase the returns on its investment in the company. First, there are a new board of directors and CEO who are placing more emphasis on capital efficiency. Second, Bloomberg reports that Johor Corp is evaluating strategic options, most likely in the form of a minority investment or other transaction that would preserve its controlling stake, as opposed to an outright sale. Either way, the increased focus on returns should drive a re-rating of the shares' EV/EBITDA multiple from 10-12x currently to ~15x.

KPJ Healthcare: Re-Energizing the Share Price

We had been bearish on the stock for several years because of 1) deceleration in growth, 2) planned significant capacity increases in Singapore, and 3) the launches of two hospitals in China. Now that the market has baked in slower growth in the core business and start-up losses in China should stabilize this year and decline in future years, we think the shares are worth a second look. Further, the lack of a clear succession plan for the Founder/Executive Chairman suggests that we have a path to an exit.

We had been bearish on the stock for several years because of 1) deceleration in growth, 2) planned significant capacity increases in Singapore, and 3) the launches of two hospitals in China. Now that the market has baked in slower growth in the core business and start-up losses in China should stabilize this year and decline in future years, we think the shares are worth a second look. Further, the lack of a clear succession plan for the Founder/Executive Chairman suggests that we have a path to an exit.

Raffles Medical Group: A Path to the Exit

Australia

Ramsay Health Care Ltd. provides health care services. The Company offers private hospital services, including, rehabilitation, psychiatric care, day, and complex surgery. Ramsay Health Care owns, operates, and manages health care facilities throughout Australia, Indonesia, and Europe.

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Ramsay Health Care (RHC AU)

Last Week in Event SPACE: Sing Air, JD Logistics, China Mobile, Angang/Bengang, Link Admin, Xiaomi

The weekend is here! Pour yourself a coffee, grab a comfortable seat, and sift through a brief summary of insights on various events discussed...

David Blennerhassett

Ramsay Health Care/Spire Healthcare

Investors may want a premium over 24%. Gross spread is (2.9)%. Long SPI LN, TP 256.5p (average of comps and DCF), c. 7% above offer. Limited...

Jesus Rodriguez Aguilar

IHH Healthcare’s Possible Privatisation by Mitsui

Mitsui, the largest shareholder, is currently exploring a proposal to privatise IHH. Overall, at the last close price, the downside risk is low...

Arun George

Raffles Medical Group: A Path to the Exit

We were bearish for several years because of slowing growth and expected drags from new facilities. We are turning bullish now that the market...

Kemp Dolliver, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Last Week in Event SPACE: Sing Air, JD Logistics, China Mobile, Angang/Bengang, Link Admin, Xiaomi

The weekend is here! Pour yourself a coffee, grab a comfortable seat, and sift through a brief summary of insights on various events discussed...

David Blennerhassett

Ramsay Health Care/Spire Healthcare

Investors may want a premium over 24%. Gross spread is (2.9)%. Long SPI LN, TP 256.5p (average of comps and DCF), c. 7% above offer. Limited...

Jesus Rodriguez Aguilar

IHH Healthcare’s Possible Privatisation by Mitsui

Mitsui, the largest shareholder, is currently exploring a proposal to privatise IHH. Overall, at the last close price, the downside risk is low...

Arun George

KPJ Healthcare: Re-Energizing the Share Price

KPJ Healthcare's controlling shareholder is taking steps to drive a re-rating by placing more emphasis on capital efficiency and evaluating some...

Kemp Dolliver, CFA

Raffles Medical Group: A Path to the Exit

We were bearish for several years because of slowing growth and expected drags from new facilities. We are turning bullish now that the market...

Kemp Dolliver, CFA