IHH Healthcare locks in cornerstones for IPO

On the IHH IPO, it seems that I may be wrong based on the news by Reuters below. However, notice that no price indication is mentioned but it did say 2.2 billion shares are on offer representing 25% of its enlarged capital with 80% new shares. Am I seeing it being valued at RM20 billion? Is it really possible? As a comparison KPJ is at RM3.66 billion.

As I said, I prefer to be wrong in this one than being right.
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(Reuters) - Blackrock Inc, Capital Group and Och-Ziff Capital Management Group have emerged as cornerstone investors in the $2 billion listing of Malaysia's IHH Healthcare Bhd, according to two sources with direct knowledge of the flotation.

The other cornerstone investors are Singapore sovereign wealth fund Government of Singapore Investment Corporation, Fullerton Fund Management, AIA Group and Hwang Investment Management, the sources said.

The dual listing of IHH, slated to debut on the Malaysian and Singapore bourses by the end of July, comes at a time when a string of initial public offerings have been delayed or scrapped because of investor worries about Europe's debt crisis and China's slowing economy.

"The profile of the cornerstone investors will give the IPO some boost in confidence," said one of the sources, who declined to be identified as the talks were confidential. "In good or bad times, it (the IPO) will still do well. It (IHH) operates in a defensive sector."

IHH is the healthcare arm of Malaysia's state investor Khazanah Nasional Bhd. Its assets include Turkish hospital group Acibadem AS, Singapore's Parkway Holdings, India's Apollo Hospitals Enterprise Ltd and Malaysia-based Pantai Hospitals and International Medical University.

It is offering 2.2 billion shares, out of which 80 percent will be new shares while the remaining secondary. The sale amounts to some 25 percent of its enlarged capital. "The cornerstones will take 1.3 billion out of the 2.2 billion shares available," said the second source, declining to elaborate.

IHH officials were not immediately available for comment.


The dual listing would be the fourth-biggest IPO in Singapore's history and Malaysia's second-largest this year after the planned listing of Malaysian plantation group Felda Global Venture Holdings Bhd. International Financial Corp, a member of the World Bank Group, has said it plans to take part in the IHH listing in a move to help validate IHH's emerging markets strategy. Reuters reported earlier that IHH was also in talks with Kuwait's sovereign wealth fund on becoming a cornerstone investor.

Malaysia's pension fund and Prudential Plc's Eastspring Investments have committed to invest in the IPO.
State-owned fund manager Permodalan Nasional Bhd and the Haj Pilgrims fund are also investors, according to the sources.

Malaysia has bucked the IPO trend in other markets such as Singapore, where motor racing firm Formula One decided to postpone its near $3 billion offering due to volatile markets.

Shares of Gas Malaysia Bhd closed 10 percent higher on their debut on Monday after a $230 million listing, overcoming the negative sentiment surrounding a slump in global market flotations.

CIMB, Bank of America Merrill Lynch and Deutsche Bank are joint lead co-ordinators, while Credit Suisse, DBS, Goldman Sachs and Maybank  are joint bookrunners. Nomura, OCBC and UBS are co-lead managers.

Other article on IHH IPO.

IHH IPO: Where's the beef?

RHB-OSK: Will 2 ordinaries merge into 1 great bank?

There is no doubt that the RHB-OSK merger is a great deal for OSK, at least on paper. Besides the RM174.3 million of net cash, OSK will end up holding 10% of the enlarged group, something for so many years having operated as a stockbroking concern is not bad at all. I have read that investors are not too happy with the valuation of 1.77x book value on OSK, hence probably the drop in the share price of OSK. Considering the fast deterioration on the future of retail stockbroking in Malaysia due to the country's inability to attract funds as well as large listings together with the thinning of commission, it is a deal which OSK will not walk away. This is despite OSK still being the leading stockbroking house in Malaysia. Perhaps just for thought, let's look at OSK's last 5 years performance, we will understand.

You will notice that revenue has somewhat tapered slowly but margin is the one that is thinning sharply. It is not due to OSK being a much lesser concern over the years but basically trading margin is deteriorating due to online trading and other newer types of competition. Stock broking is not lucrative anymore. One would say, what about investment banking. In Malaysia, if you are not CIMB or to a certain extent Maybank Investment, one should not even bother.

What about RHB as a bank?

After a series of mergers 10 or more years ago, it is today a bank that is not exciting but has somewhat stabilized. RHB today is a result of Kwong Yik, Sime Bank (UMBC), DCB Bank combined but unable to carry the combined dynamism. What is its strength today? I really could not think of any. It is not strong in retail, corporate - not particularly able to reach out to the middle working class or even the wealthy. It is a so so bank in every angle.

By merging an average bank which in my eyes has no particular strategy with a deteriorating investment bank may not achieve anything.

RHB has stabilized in terms of its income. However it does not seem to have a solid strategy to enable it to grow more than average. Over the years with the liberalisation of the banking industry, I have a feeling that RHB will be acquired

In business, if you are not great but somewhat stays in an attractive and ever changing industry landscape, you will be taken over. May not necessarily be a bad proposition sometimes for an investor. If you notice in Malaysia, we have slowed down the liberalisations of our financial industry. CIMB and Maybank over the past few years have gone out acquiring banks in our neighboring countries but we do not see this happening in Malaysia from other financial institutions. What we only see are new correspondence banks being setup or perhaps foreign banks allowed to increase their number of branches. This slow in liberalising the industry may draw flak (in fact already) from our neighboring countries and internationally as we do not reciprocate what other countries have allowed us to do. Do you really see Singaporean, Indonesian or Thai banks acquiring our financial institutions? The fact of the matter is that CIMB, Maybank or Public Bank for the matter can already compete on equal footing against any other overseas banks.

Hence, I see that RHB Bank may become a candidate for takeover especially it is now owned by EPF. EPF will be able to put stabilisation effect to RHB but will not turn RHB into a dynamic organization. At its current Price to Book Value of 1.4x, RHB Capital is a very attractive concern especially for its branch and customer reach which any foreign concern would be attracted to.

The fact of the matter is that this merger would not do much to turning the RHB Group into something special but perhaps give some additional impetus or dynamism to the retail stockbroking arm of RHB. In fact, as I see it over time, EPF may allow some dynamic organization to take over the banking concern. Much better this way.

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OSK at its current price of RM1.35 and market cap at RM1.3 billion seems to be attractive with the deal.

IHH IPO: Will Khazanah need to pull the rabbit out of the hat?

Private healthcare is great and a fast growing business especially when you consider that many nations in this world are greying. As a result, it may not be that difficult to sell an IPO of supposedly the second largest private hospital group in the world. At this moment, there is yet to be any conclusion on what will the market value be for the IPO, however indication from the Managing Director of Khazanah is that it will be slightly smaller than Felda's IPO. Since Felda is valued at around RM16.6 billion, would RM15 billion be close to the mark? In fact, the latest apparently, IHH is to be valued in excess of RM20 billion.

First of all, how does Khazanah get into owning so many hospitals so fast?

1. Started off with a controlling stake in Pantai Hospital Group when there were complaints of Parkway acquiring strategic hospital assets in Malaysia. As a result, Khazanah was used to purchase an effective 60% stake of Pantai Hospitals from Parkway. Hence Khazanah started off with owning all the Pantai(s) in Malaysia.
2. Instead of just expanding its list of private hospitals in Malaysia, Khazanah started to accrue many more hospitals overseas hence turning itself into the 2nd largest group. In its acquisition of Parkway in Singapore, Khazanah had to fend off controlling ownership and later buyoff the Group from the Fortis Group of India. Price: USD3.3billion (RM10.56 billion) at valuation of 39x PE based on Parkway's financial results for 2009.
3. Latest round of acquisition, the IHH group under Khazanah bought into 60% of Acibadem group at valuation of between USD1.1 billion to RM1.68 billion depending on which group they bought from. Based on my calculation, the valuation on Acibadem is in excess of 15x EBITDA and more than 100x PE. Even if it is calculated at Price / Book Value it is more than 14x book value.
4. On top of that, Khazanah already owns 12.2% of Apollo Hospitals which it acquired as an investment in 2005.

Financials of Acibadem before the acquisition from IHH

Hence, despite Khazanah managed to accumulate that many hospitals, it is at the expense of very high price being paid for these assets.

Latest Structure for the IHH Group

Although the proforma financials for IHH is not yet available, based on my estimation from past financials here are possible contributions from each.

As a comparison, KPJ Group (2700 beds) has a net profit of RM150 million for FY2011, hence RM473.4M for IHH may not be off the mark by far. The very profitable and more luxurious Bangkok Dusit Hospital Group (4,987 beds) on the other hand, made around RM487 million for FY2011. Its market cap todate is around RM13.9 billion with Price / Net Asset at 4.15x at PE around 28x

If that number is close to accurate, I would think to achieve market valuation of around RM20 billion, Khazanah will be selling this IPO at not less than 40x historical PE, which is very little room for valuation growth. At that price, I think the national investment arm will have a hard time looking for takers especially at a time when many companies are postponing IPOs.

I hope I am wrong for this one!


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(Note that the combined valuation of Parkway and Acibadem were USD4.4 billion (RM14 billion) when they were taken private. How much do you think the listed IHH would be? Would Khazanah be willing to take a valuation cut if it is going for RM15 billion or less? Hence the question, is Khazanah that desperate to sell?)  


Anyway, is the term 2nd largest misleading as it only owns 12.2% of Apollo?

Note:
Despite all the positiveness, the business of private healthcare which has a great advantage i.e. its pricing inelasticity is facing greater competition in future. I still like the IHH private healthcare group though as a business but the issue here is price. Frankly, I do not see the need to rush this IPO. If Khazanah is not valuing the IPO at in excess of RM15 billion, why do they need to let go part of the group at a lower price especially when the purchases were made at a high price. They could have waited it out and do the IPO by 2013 or 2014. I do not believe this is a political IPO either unlike the Felda IPO which they need to be quick.

Other article on IHH IPO:

IHH IPO: Where's the beef?

Should EPF reinvests into KFC?

Unlike the McDonald's franchise, KFC is a franchise which has garnered quite a bit of corporate news in Malaysia over the years. If you noticed the history of KFC franchise in Malaysia, it has changed hands quite a few times. The reason for this is that KFC is a very strong franchise particularly in this region and over those years, the owners that controlled the franchise are never that financially strong to really stake their claims decisively. Hence, on one hand the franchise itself is attractive (as it is a strong cash generating business with good dividends) but on the other hand, parties that are acquiring the controlling stake are never able to consolidate their positions in the group. In its history of owners, most of them are having the wrong mindset when comes to its ownership - they see KFC as the golden goose - not knowing that it was still a business which they really need to nurture for growth.

In 2005, with the assistance of CIMB as the debt financier, Johor Corp managed to take control of KFC via its control of QSR (holding company of KFC). Unfortunately, Johor Corp was exactly in the same mould as the scenario I mentioned above. They are never financially strong to see through it but on the other hand, they know that it is a golden goose. They are reluctant to sell the goose. In keeping the goose however, their debt ballooned. (CIMB as the hand that fed them will definitely not sit still and allow that to happen - as the nation's most INNOVATIVE investment banker, why not make more from other fees besides the income from interest). Hence, the pressure for the Johor Corp Group to restructure their finances. To restructure, they need to do something with KFC.

As in the above structure, although Johor Corp is able to control KFC, effectively it only has 15.1% stake in the fast food franchise. Even though KFC is the golden goose assumingly, there are not much to be reaped from the group once it reaches to Johor Corp. The 15% effective ownership is not going to solve its debt problem even though KFC gives good dividend. One must remember the prized possession here is KFC, not QSR and not really Kulim. Johor Corp nevertheless has control of the group through the layered ownership despite the continuous mess surrounding KFC's structure.

To top off the mess, the Johor Corp group made some related party transactions which from news pissed off EPF. In an unusual move EPF which owned some 10% of KFC sold off its entire invested stake in KFC. I am not sure what are the reasons which caused this but if you look at some announcements, KFC was buying several pieces of land from Johor Corp for development of new restaurant sites and other business purposes. Transactions like this would be hard to quantify especially on its valuations and other strategic reasons.

Now with the new structure, EPF is back to KFC. It seems that EPF has already changed its perception in Johor Corp for them to now decide to have effective 25% control of KFC group. What makes them change their mind? Better control now? Tough one to convince I would say as the ultimate controlling shareholder remains the same. If those concerns however are really resolved, then I would say KFC is worth it as there are not many assets like this out there.

BJToto divesting Sports Toto into a trust in Singapore - My view

Do you see something coming when Ananda Krishnan divested his Tanjong's gaming business? Quite interestingly, rumour has it that it was his son (who is a Buddhist monk) who advised him to sell, as owning a gaming business is against his Buddhism practice. Perhaps, but my question is would he sell the business when it was enjoying good growth. At least that one went the right way towards education. I actually liked it.

This BJToto deal on the other hand goes in the name of unlocking value as apparently the stock is being avoided by Shariah compliant funds. By going to Singapore it will be able to attract more funds - really? More funds yes but not necessarily better valuation. The fact of the matter is that gaming business in Malaysia is not enjoying growth anymore.

In fact as seen above, the last 3 years revenue growth stagnated while profit dropped. BJToto for the Berjaya family is still great. It is literally a money printing machine (in fact better) as their costs are just the paper and printers where the numbers are being printed from. No more marketing, no more mind boggling ideas on how to grow the business. At the end of the year, they still earn in excess of RM5 million salaries and tonnes of dividends. Who would want to let go business like this?

For other shareholders though, what used to be a great investment, the holding of BJToto has become purely a dividend share for the last few years with no capital appreciation. No doubt to some, it is still decent though as the yield is more than your FD now. However, do you know that Berjaya is squeezing more money from debt to pay you?

By reaching out to Singapore, do you think they will be able to expand the gaming business. Expand yes, but competition is also much greater. The fact of the matter is that gaming business globally has become more open and competitive. Tell me which government will provide Berjaya Group gaming license, like the one given by Malaysian government 20 years ago where it was a monopoly for lotto and just 2 other competitors for the 4 digit gaming business. Seriously, what was once ideal later became a business - it was supposed to provide funding for Malaysian sports, hence the name.

Another example of gaming gets tougher - Just look at the mess Genting is getting into in New York now.

The writer feels that gaming actually is more than a political lobbying business.