ISEC Healthcare - Maybank Kim Eng 2016-05-30: EPS-accretive acquisition in complementary space

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ISEC HEALTHCARE LTD 40T.SI 

ISEC Healthcare (ISEC SP) - EPS-accretive acquisition in complementary space 

First M&A deal of the year 

• We maintain BUY for ISEC with a higher TP of SGD0.42, based on 30x FY16 P/E, or a 15% discount to peer average. 
• This follows 7-8% forecast revisions to FY17-18E EPS, as ISEC has proposed the acquisition of JL Medical, a group of four GP and aesthetic clinics in Singapore. 
• ISEC is expanding into complementary specialties. Valued at SGD13.9m or just 12x P/E, this will be an EPS-accretive deal as ISEC itself trades at only 20x FY16E PE, still the cheapest of the healthcare stocks we have under coverage. 

Proposes EPS-accretive M&A deal at 12x P/E 

• ISEC intends to acquire JL Medical, a chain of four GP and aesthetic clinics in Singapore for SGD13.9m or 12x P/E. 
• With a 5-year profit guarantee of SGD1.1m pa, we raise FY17 EPS by 8% and FY18 by 7%. It is a 50/50 cash/shares deal, with stock to be issued at SGD0.25, a 10% discount. The three vendors/doctors will sign 5-year service contracts and their shares will be subject to 20% reducing balance moratoriums over five years. 

Conditions precedent – EGM, SIC waiver needed 

• We have assumed a four-month impact from JL in FY16, as there are several conditions that ISEC has to meet. They include an EGM to obtain independent shareholder approval as this deal is an IPT deal. 
• The biggest vendor of JL is the spouse of Dr Lee, who currently owns 33% of ISEC (36% post-deal). 
• In addition, SIC will need to grant a whitewash waiver on the need for an MGO. SIC approval is likely to take 3 months. 

Enough cash for SGD40m more in complementary deals 

• With JL, ISEC will expand into complementary specialties such as GP and aesthetics. This deal is the first of a string of potential upcoming projects, including three ophthalmology clinics in Malaysia and an eye hospital in Vietnam. 
• With c.SGD20m in cash left, it can fund another SGD40m of M&A deals.

Gregory Yap Maybank Kim Eng | John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-05-30

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.42 Up 0.40