Health Management International - A Malaysian hospital operator


● Potential USD250m sale of Mahkota Medical Centre off the table

● Organic growth via capacity expansion and more service offerings

● FY11-15 revenue +18.7% CAGR, EBITDA margin +10.8pp to 21.6%

Background:
In April 2015, Health Management International (HMI) made the headlines for the potential sale of its 49% stake in its prized asset – a hospital in Malacca, Malaysia – for USD250m. We met with HMI last week and understand that a sale is now off the table, with management looking to refocus its efforts on growing the business.

Highlights:
The hospital in question is the 266-bed Mahkota Medical Centre (MMC). HMI also has a 218-bed hospital, Regency Specialist Hospital (RSH), in Iskandar, Johor. For now, management is focused on organic growth by expanding capacity and introducing new services. Management aims to add 55 beds to MMC in FY16 to support the rising demand for day surgery. Management noted that day surgery offers higher margins vs. overnight/long stays. At RSH, HMI is constructing a new 10- storey medical outpatient block, due to be completed by end-2017. Recently, it introduced PET-CT scanning services at MMC.

So far, organic growth has borne fruits. Over FY11-15, overall revenue rose at a CAGR of 18.7% to MYR345m, while the EBITDA margin expanded by 10.8pp to 21.6%. At MMC, the EBITDA margin came in at 26.6% for FY15. Management shared that RSH’s EBITDA margin could expand further (FY13: 0.4%, FY15: 17.3%), as its economies of scale improve.

Apart from organic growth, HMI said that it is open to M&A activities. It has the means to pursue targets. As of 30 June 2015, HMI’s net debt-to-LTM EBITDA was near zero, down from 3.5x in FY11. Management shared that medical investments in Malaysia gravitated towards Kuala Lumpur and Penang. While it did not specify the geographical focus of its M&A pursuits, management said it was open to both mid-tier (such as its existing assets) and high-end hospitals.

Foreigners make up 30% and <5% of the patient loads at MMC and RSH, driven by HMI’s network of 19 patient referral centres across Southeast Asia, mostly in Indonesia. Management said it does not differentiate price points between foreign and domestic patients. However, the former tends to spend 1.5x more than the latter.

According to HMI, its annual maintenance capex budget is about MYR18m with two-thirds directed towards MMC and the remainder used at RSH. HMI also runs a 11k sq ft healthcare training education facility in Singapore that provides nursing education and healthcare vocational skills training.

Technical Analysis
Daily Chart
Valuation:
According to the Bloomberg consensus, HMI’s stock is trading at FY15E PER of 21.5x and PBR of 4.1x. No broker covers the stock. (Read Report)

Source : Daiwa Capital Markets

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