Integrated healthcare provider IHH Healthcare : Q0F +1.39%’s RM3.9 billion (S$1.17 billion) acquisition of Penang’s Island Hospital will propel the group to a leading healthcare provider for medical tourists, doubling down on the flow of patients coming from nearby regions, said analysts.

They are largely positive due to longer-term earnings accretion, but note that the acquisition came at a premium valuation and the transaction is pending the finalisation of its funding structure.

Macquarie Capital research analyst Gan Huan Wen said that the 600-bed Island Hospital, which IHH acquired from private equity firm Affinity Equity Partners, is a top destination for medical tourists; in comparison, medical tourism revenue makes up just 5 to 6 per cent of IHH’s Malaysia revenue.

Medical tourists generally bring in higher revenue per patient, too. “Island Hospital’s RM12,000 per patient average is 12 per cent above that of IHH’s Malaysia operations,” he added.

IHH’s acquisition will increase the group’s prominence among medical tourists, particularly those from Indonesia, said Gan. He estimated that Indonesians contribute more than 55 per cent of healthcare traveller receipts in Malaysia.

CGS International analyst Tay Wee Kuang said that the acquisition will support IHH’s ambitions to grow its northern Malaysia cluster as a medical tourism hub. IHH group chief executive Prem Nair said in a briefing after the announcement that the group has clusters of hospitals across Malaysia with their own area of coverage, and, as a system, the hospitals in each group work collaboratively.

Kenanga Investment research analyst Raymond Choo similarly noted that Penang is considered a regional hub for medical tourism, accounting for 51 per cent volume share of inbound foreign patients into Malaysia.

He believes the new hospital will be an integral part of IHH’s cluster strategy, with Penang serving as the group’s second-largest Malaysian cluster.

Choo added that Island Hospital is “strategically located” due to its proximity to one of IHH’s existing hospitals, Gleneagles Hospital Penang. Island Hospital services are complementary to Gleneagles Penang and patients can be decanted to the former since it has capacity in its new wing, he said in a note.

Said CGS’ Tay: “The acquisition of Island Hospital could also yield immediate commercial synergies by allowing IHH to receive more patients who it previously would have lost to Island due to limited bed capacity.”

The RM3.9 billion deal also includes an adjacent vacant land measuring 120,000 square metres, valued at RM223.4 million. An AmInvestment Bank report noted: “This land could significantly expand Island Hospital’s bed capacity by 400 to 1,000.”

Macquarie’s Gan said that the acquisition was valued “significantly above” the 13 times enterprise value (EV) to earnings before interest, taxes, depreciation and amortisation (Ebitda) multiple that IHH is trading at.

An RHB research note on the deal also pointed out that Island Hospital’s valuation works out to an EV/Ebitda of 24.6 times, based on the trailing 12-month financial results of the hospital.

This is 22 per cent higher than the 20.1 times EV/Ebitda in a similar deal involving a Malaysian healthcare asset: Columbia Asia’s purchase of Ramsay Sime Darby Health Care in November 2023.

“We believe the premium valuation is justified considering Island Hospital’s superior margin profile and growth prospect”

The analyst added: “We believe the premium valuation is justified considering Island Hospital’s superior margin profile (a first-half profit after tax of 15 per cent) and growth prospect (a 40 per cent 2025 Ebitda growth).”

Analysts also find the deal favourable given its earnings-accretive nature – IHH group chief financial officer Dilip Kadambi believes the deal will be earnings-per-share accretive in 2026.

That said, the analysts highlighted that the funding mix is uncertain at this juncture. IHH had said that the transaction will be funded through the internally generated funds of IHH and its subsidiaries, as well as external borrowings.

The RHB research analyst said: “If the deal is funded by 80 per cent debt and 20 per cent cash and is completed by November, we estimate potential earnings accretion of 2 per cent for 2024 and 9 per cent for 2025.”

Kenanga’s Choo, meanwhile, expects the acquisition to be short-term earnings dilutive with some gestation.

Senior management also told analysts that the acquisition would have negatively impacted IHH’s FY2023 earnings by RM110.9 million, due to finance costs increasing by RM157 million. This is assuming the acquisition is funded fully by debt at a 4 per cent interest rate.

Nonetheless, CGS’ Tay added: “We continue to like IHH as we expect revenue momentum to remain robust from more extensive services across both hospitals and out-of-hospital facilities.”

Shares of IHH finished on Thursday at S$1.94, up S$0.03 or 1.6 per cent.