ISEC Healthcare - M&A Haze Clearing Up; U/G to BUY


■ Acquisition of Melaka-based SSEC at 12.4x P/E should add 9% to FY16 EPS. Completion expected at end-2015.

■ With stock below IPO price & deal pipeline largely intact, we find risk/reward favourable. M&As could gather pace.

Upgrade to BUY from HOLD. TP unchanged at SGD0.40 based on 27x FY16 EPS vs 30x FY15 EPS, 10% discount to peers.

What’s New
ISEC announced a sale & purchase agreement (SPA) to acquire Melaka-based Southern Specialists Eye Centre (SSEC), one of the largest and most reputable private ophthalmology practices in Malaysia next to ISEC. We believe Melaka is a good eye-specialist market to enter, given its proximity to the medical-tourism markets of Southern Sumatra and Singapore. ISEC will pay MYR37.1m or 12.4x SSEC’s FY14 earnings, 57% in shares and 43% in cash. All three SSEC doctors will become ISEC shareholders. We estimate a 17%/9% boost to FY16 profits/EPS.

What’s Our View
With SSEC under its belt and the growing maturity of its deal pipeline, we believe ISEC’s M&A pace could pick up. Its Melaka acquisition is the first backed by an SPA vs an MOU for its CT Eye Hospital in Vietnam in April. A conclusion before end-2015 should allow management to focus on its other deals. Its pipeline includes two sizeable prospects in Taiwan and Indonesia.

Technical Analysis
Daily Chart
Now that the stock has retreated below its IPO price of SGD0.28, its risk/reward has turned favourable, in our view. ISEC has also become the cheapest in our healthcare universe; even if MYR depreciates further, it should remain the cheapest, in our reckoning. We think the stock is undervalued. Upgrade to BUY with TP unchanged at SGD0.40 after rolling over to 27x FY16 EPS from 30x FY15 EPS. Our 27x target is set at a 10% discount to its peer average of 30x, in view of its size. (Read Report)

Source : Maybank Kim Eng Research

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