Let It Go

 

Health Management International was incorporated in 1998 and listed in SGX Sesdeq in 1999 and upgraded to SGX mainboard in 2008. 

The group operates two tertiary care hospital in Malaysia:

• Mahkota Medical Centre, Malacca (MMC)

• Regency Specialist Hospital, Johor. (RSH)

Other activities includes: 

• Patient representative offices are located in Singapore,Malaysia, Cambodia and Indonesia. 

• HMI Institute of Health Sciences in Singapore.

Recent acquisitions were:

• SSC (StarMed) a private ambulatory centre in Singapore

• 28% stake in Plus Medical Holdings - a primary care clinic in Singapore

On 5 Jul 2019, EQT a European Investment firm offer to privatise HMI for $0.73 per share.

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General Observation

HMI revenue had been growing steadily since incorporation with increasing gross margin. Net margin first peak was in FYJun15 at 8.0% in part due to exceptionally low tax paid for the year.

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Earning in FYJun16 & 17 weakened to 4.7% ~ 5.0% as expenses increased from 14.2% in FY15 to 18.7% in FY17. 

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Meanwhile, contribution from non-controlling interest in MMC expanded from RM1.2M to RM21.6M between FY10 - FY17 (Peaked in FY15 & 16 at RM25M). Chart 1 reflects this underlying dynamic.

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In 3QMar17, HMI increased MMC stake from 48.9% to 100%.

Without the need to deduct non-controlling interest, net profit from 4QJun17 onward skyrocketed. In FYJun18 HMI recorded a profit of RM60.6M. 

However, this also meant company debt increased substantially and along with it finance cost. 

Free cashflow turned negative in FY17 and FY19 as a result of growth through acquisition and debt.

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No dividend was declared for FYJun19.

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Opinion

With the recent opening of new hospital KPJ Bandar Dat Onn Hospital and 

Columbia Asia Southkey Hospital by end 2019; demand for doctors, nurses and skilled staff will likely increase operating cost. 

The increase in supply coupled with gestation period for recent acquisitions implies quite some challenges ahead.

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Gross margin have declined from 35.6% to 33.4% between 1HDec18 to 2HJun19. The high double digits growth in revenue have slowed to single digit growth the last two fiscal years. Along with a significant increase in debt load, it does make sense for HMI to be under the umbrella of a private equity firm with deeper pocket and access of efficient source of capital. 

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At an offer price of $0.73, this may be a good opportunity to let it go.