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IHH, This One Is Fairer

Malaysia is the third-most-active venue for the IPOs globally this year after Felda's offering, up from 20th place at this time last year. IPOs on the Bursa Malaysia have raised $3.45 billion already, according to data provider Dealogic. A successful offering by IHH will only further strengthen Malaysia's standing in the global IPO market this year.

Despite the resounding 'success' of FGV, the book building among foreign institutions have been naturally disappointing. Many got less than 1% of what they actually bidded for. Both these big IPOs went for the cornerstone strategy, which requires pricing it well since they will be locking up for 6 months. Little for foreign institutions meant that market prices will move up as investors top up their holdings.

Bear in mind, the real market price is 6 months later when the lock up expires.

Elsewhere in the region, companies have been either delaying and cancelling their IPOs on worries about the euro-zone debt crisis and souring investment sentiment. In Singapore a $2.5 billion deal by motor-sport franchise Formula One Group was delayed earlier this month, while a $1 billion Hong Kong IPO by U.K.-based jeweler Graff Diamond Corp. was pulled.

Kuwait Investment Authority (KIA) will invest about US$150 million (RM477.8 million) in Malaysian firm IHH Healthcare’s planned US$2 billion (RM6.4 billion) IPO in Kuala Lumpur and Singapore. The investment is poised to make KIA the second-biggest investor in the Malaysian healthcare firm’s IPO. It will be the fund’s biggest investment in an Asian flotation since it poured US$800 million (RM2.5 billion) into Agricultural Bank of China’s US$21 billion (RM66.9 billion) offering in 2010.

With a heavy reliance on cornerstone investors and domestic demand, Malaysia has bucked the dismal IPO trend in other markets such as Singapore, where motor racing firm Formula One decided to delay its near US$3 billion (RM9.6 billion) offering due to volatile markets. In the latest blow to Asian deals, soccer club Manchester United also ditched its plans for an Asian stock market flotation and is preparing to list in the United States.

Cornerstone investors back many Asian listings, committing to buy large, guaranteed stakes and agreeing to a lock-up period during which they will not sell their shares.

KIA, which manages US$280 billion (RM891.4 billion) in assets, invests in big-ticket IPOs, but has been lately keeping its powder dry amid volatile markets. Malaysia pension fund EPF will separately invest about US$200 million (RM636.7 million) in the IHH IPO, making it the biggest investor in the deal, said the sources, who could not be named because the details of the deal are not public.

The IHH IPO is expected to be priced in the second week of July and the listing is scheduled in the week starting July 23, according to a term sheet. IHH this week already locked in BlackRock Inc, Capital Group and Och-Ziff Capital Management Group as cornerstone investors for its dual listing. The board of International Finance Corp (IFC), the financial arm of the World Bank, has also approved a proposal to become a cornerstone investor in IHH’s offering.

Finance Asia: Malaysia-based hospital operator IHH is looking to raise up to $2.2 billion but, excluding the cornerstones, only $280 million will be available for institutional investors.

Perhaps it is the fact that the company is operating in the healthcare industry that makes it so prudent, but IHH Healthcare, which is backed by state-owned Malaysian investment company Khazanah Internasional, is certainly taking no chances with its initial public offering.

In addition to the 15% of the offering that has already been set aside for Bumiputera, or ethnic Malay investors, the company has secured commitments from 22 cornerstone investors that will buy 57.7% of the deal.

In terms of the number of cornerstones, this may well be a record in Asia, but perhaps even more noteworthy is the quality of the accounts. The line-up comprises 12 international accounts, including three sovereign wealth funds and the International Finance Corp, as well as 10 Malaysian entities. A couple of the cornerstones were shareholders in Parkway and Pantai before these two units were taken private by IHH and delisted from the Bursa Malaysia and the Singapore Exchange in 2007 and 2010 respectively.

Another 14.6% has been earmarked for retail investors in Malaysia and Singapore, as well as directors and employees of the group, which means that only about 12.8% of the offering will be available to institutions through the bookbuilding that will kick off in early July.

Based on the earlier announced maximum price of M$2.85 per share and the announcement on Friday that IHH will sell up to 2.4 billion shares, including a 7.6% greenshoe, the deal could raise up to M$6.85 billion ($2.2 billion). But after taking away the other tranches, there will be only about $280 million worth of shares for international and non-Bumi Malaysian institutions combined. And that includes the greenshoe. Excluding the shoe, the institutional tranche will amount to only $124 million. Given the scarcity of shares, though, it is highly likely that the greenshoe will be exercised.

One could argue that the bookrunners may have gone a bit overboard by leaving so few shares for non-cornerstone institutions, but sources say the presence of so many high-profile cornerstones will help to validate the valuation, which involves quite a lot of assumptions about the growth in the next few years.

IHH currently has more than 4,900 beds divided on 30 hospitals as well as medical centres, clinics and other healthcare businesses across eight countries in Asia, the Middle East and Eastern Europe. Most of the beds are located in Malaysia, Singapore and Turkey — countries that the company refers to as its “home markets”. However, it will add a further 3,300 beds in the next five years, including the new Mt Elizabeth Novena hospital in Singapore, which is scheduled to open next month and will add about 333 beds by the end of 2013. The growth will come from new hospital developments as well as expansion of its existing facilities.

Importantly, the company has already paid about 75% of the capital expenditures for the new beds being added in the next five years, which means the ramp-up should have a significant impact on earnings.

Because of IHH’s many different businesses — apart from its core operations in Malaysia, Singapore and Turkey it also holds a 36% stake in Singapore-listed Parkway Real Estate Investment Trust (Reit) and an 11.2% stake in India-listed Apollo Hospital — and the lack of current earnings contributions from Mount Elizabeth Novena, analysts are using a discounted cash flow (DCF) and sum-of-parts-based methodology to value the company. DCF allows them to capture the strong cash-flow generation of the sector, as well as its defensive nature and structural growth prospects, but with the DCF assumptions being different for different countries, it does take some work to understand the valuation.

Syndicate analysts argue that the fair equity value for the company based on these calculations is about $8 billion to $10.5 billion, while the maximum price per share translates into an equity value of about $8.8 billion. The latter implies a 2013 enterprise value-to-Ebitda multiple of 16 times, which looks rich compare to other regional hospital operators like Singapore-listed Raffles Medical Group, Bangkok-listed Bangkok Dusit and India’s Apollo, which trade at about 13 to 14 times.

However, if you remove Mt Elizabeth Novena from the calculation, since it has yet to contribute any revenues, IHH’s EV/Ebitda multiple drops to about 11 times, according to a source. Analysts argue that IHH should trade at a premium to comps, however, due to its greater scale (versus other Asian operators) and stronger growth prospects (versus its US and Australian peers). Investors will have to get their heads around these numbers and in that context it should be helful that 22 cornerstones have already given their okay.

It is perhaps also lucky that the IPO process is so drawn out, as it will allow investors more time-than-usual to work on the numbers. The reason for the lengthy process is that the company is seeking to list in both Kuala Lumpur and Singapore, which means it will have to adhere to the rules related to prospectus exposures in both countries. Initially it will only offer shares to retail investors in Singapore, while the shares sold to institutional investors will all be listed in KL, but in terms of the timetable that makes no difference.

The company started investor education on June 8 and kicked off the management roadshow last Friday. However, the institutional order books will only be open from July 4 to 12. The pricing will follow shortly thereafter, while the trading debut is scheduled for July 28.

IHH is selling approximately 2.235 billion shares as part of the base offering, of which 1.8 billion are new. The remaining 434.7 million shares are secondary paper that will be sold by Abraaj Capital, the former owner of the Acibadem hospital in Turkey which got paid partly in shares when IHH acquired the business. Abraaj will sell its entire stake through the IPO.

In addition to that, there is a greenshoe of 169.4 million secondary shares that will be sold by Khazanah.

Including the shoe, the offering will account for 30% of IHH’s enlarged share capital. After the IPO, Khazanah will hold about 46%, while Japan’s Mitsui group will own 21% and the chairman of Acibadem Group about 3%.

The price range will be set just before the start of the bookbuilding, so the final proceeds have yet to be determined. But according to the preliminary prospectus, IHH will use 90.9% of the money raised to repay bank borrowings. A source said that this will reduce the company’s net debt-to-Ebitda ratio to about one time from five times based on 2012 numbers, which should put it in a good position to finance its future growth and to acquire additional assets. 

One of the key buying arguments is scale. IHH will be the second-largest listed hospital operator in the world after HCA in the US and the largest in the high-growth emerging markets. It will be about twice the size of Bangkok Dusit, which is currently the largest hospital operator in Asia with a market cap of just under $450 million. The other companies in the sector are significantly smaller and, according to a source, the seven largest listed hospital operators in Asia have a combined daily turnover of only about $45 million.

The hospital sector is also quite defensive with visible earnings and predictable cash-flow generation. Healthcare spending is underpinned by rising GDP per capita, rising affluence and ageing population, and one syndicate research report noted that the growth of hospital beds has lagged the population growth in IHH’s home markets, which has resulted in a supply shortfall. This is helping to spur a migration to private-sector hospitals. Another growth driver is medical tourism, which is not only contributing to an increase in admissions, but is also pushing up margins.

The prospectus doesn’t provide a breakdown of how much each of the cornerstone investors are buying, except to note that Malaysia’s Employee Provident Fund Board is taking 200 million shares, or about 8.95% of the total offering (pre-shoe), and the Kuwait Investment Authority is buying 150 million shares, or 6.7% of the deal.

The other cornerstones are AIA Group, Blackrock Investment Management, Capital Group International, Capital Research Global Investors, CIMB-Principal Asset Management, CMY Capital Markets, Eastspring Investments, Fullerton Fund Management (a unit of Temasek), The Government of Singapore Investment Corp (GIC), HPL Investers and Como Holdings, Hwang Investment Management, International Finance Corp, JF Asset Management, Keck Seng (Malaysia) and Keck Seng (Hong Kong), Kencana Capital, Lembaga Tabung Haji, Mezzanine Equities, Newton Investment Management, Och-Ziff Capital Management Group, and Permodalan Nasional Berhad (BNP).

Bank of America Merrill Lynch, CIMB and Deutsche Bank are global coordinators and bookrunners. Credit Suisse, DBS, and Goldman Sachs are joint bookrunners.

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