20151020-Maybank_KERPL-M_A_Haze_Clearing_Up__U_G_to_BUY_11页_596kb

ISEC Healthcare Summary

Core Content

ISEC Healthcare (ISEC SP) is a Singapore-based healthcare company primarily focused on ophthalmology services. The company has upgraded its rating to BUY from HOLD, based on its recent acquisition of SSEC, a leading private ophthalmology practice in Melaka, Malaysia. The acquisition is expected to be completed by the end of 2015 and is valued at MYR37.1m (12.4x P/E based on FY14 earnings), with 43% in cash and 57% in shares. This acquisition is projected to increase ISEC's FY16 EPS by 9% and profits by 17%, with the potential for further growth in FY17.

Main Points

• Acquisition of SSEC: The deal is ISEC's first significant M&A backed by an SPA, not just an MOU. This acquisition is expected to significantly enhance ISEC's market presence in Malaysia.
• Share Structure: ISEC will issue 30.71 million shares (6.28% of enlarged share capital) to acquire SSEC, with the main shareholders (Dr Yeo and his wife) receiving the majority of the consideration.
• M&A Pipeline: ISEC has a pipeline of two large M&A prospects in Taiwan and Indonesia, and has also signed an MOU for a CT Eye Hospital in Vietnam.
• Stock Valuation: ISEC's current share price is SGD0.27, and the target price remains at SGD0.40 (+48% upside), based on a 27x FY16 core EPS valuation, which is a 10% discount to the peer average of 30x.
• Financial Performance:
  • Revenue is forecasted to grow from SGD22.3m in FY13 to SGD35.6m in FY17.
  • Core EPS is expected to rise from 1.3cts in FY14 to 1.6cts in FY16.
  • Core net profit is projected to increase from SGD5.3m in FY15 to SGD7.9m in FY17.
• Valuation Metrics:
  • Core P/E has decreased from 23.4x in FY14 to 16.7x in FY17.
  • P/BV has declined from 9.6x in FY13 to 2.3x in FY17.
  • EV/EBITDA has fallen from 18.7x in FY14 to 7.6x in FY17.
• Share Price Performance:
  • ISEC has underperformed in the past few months, trading below its IPO price of SGD0.28.
  • The stock has a 52-week high/low of SGD0.52 / SGD0.21, with an average 3-month turnover of USD0.1m.
• Dividend Yield: The net dividend yield is expected to increase from 0.0% in FY13 to 2.1% in FY17.
• ROE and ROAA: ISEC's ROAE has decreased from 55.5% in FY13 to 14.1% in FY17, while ROAA has also declined from 33.2% to 12.4%.
• FX Sensitivity: Despite MYR weakness, ISEC's SGD-based earnings help mitigate the impact, with a 10% MYR depreciation estimated to reduce earnings by 8%.
• EPS Forecast: ISEC's core EPS is expected to grow significantly in FY16, with a 35% increase in core net profit.

Key Information

• Target Price: SGD0.40, unchanged from the previous target, based on a 27x FY16 core EPS.
• Deal Completion: Expected by the end of 2015, allowing ISEC to focus on other M&A deals in its pipeline.
• Share Dilution: The acquisition is expected to dilute ISEC's existing share capital by 6.7%, with an expanded dilution of 6.28%.
• Market Position: ISEC is currently the cheapest in the healthcare universe, with a 20x P/E valuation.
• Risk/Reward: The company's stock has retreated below its IPO price, making the risk/reward proposition more favorable.
• Moratorium Lift: The pre-IPO shareholders' moratorium will be lifted by end-October 2015, but we expect the sale process to be controlled, with shares likely to be repurchased by larger shareholders.
• Challenges: The M&A process is expected to take longer than anticipated due to regulatory hurdles and the complexity of foreign acquisitions.

Conclusion

ISEC Healthcare is well-positioned for growth with its recent acquisition of SSEC and a robust M&A pipeline. The company's current valuation is attractive, and the stock is considered undervalued. The management is optimistic about the future, and the upgrade to BUY reflects the improved outlook. However, there are still risks related to foreign acquisitions and currency fluctuations.