ISEC Healthcare - Maybank Kim Eng 2015-10-20: M&A Haze Clearing Up; U/G to BUY

ISEC Healthcare - Maybank Kim Eng 2015-10-20: M&A Haze Clearing Up; U/G to BUY ISEC HEALTHCARE LTD 40T.SI 

M&A Haze Clearing Up; U/G to BUY 

  • Acquisition of Melaka-based SSEC at 12.8x 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 12.8x 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. 
  • 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.

Gregory Yap Maybank Kim Eng | John Cheong Maybank Kim Eng | 2015-10-20
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