Qualitas next healthcare company to seek IPO

Healthcare operators have enjoyed strong valuations thanks to their growth throughout Southeast Asia, but pricing a company dedicated to outpatient services will be difficult.
Healthcare is a hot sector in Asia, although some question how much upside is left
Healthcare is a hot sector in Asia, although some question how much upside is left

Malaysia’s Qualitas Healthcare Corporation is the latest Southeast Asian healthcare company seeking to float its shares, and early indications are that investors are keen on the company.

A handful of institutions — all Malaysian — have signed non-disclosure agreements to come in as cornerstone investors. If all the cornerstones invest in the IPO, there will not be much stock available for the retail and institutional tranche, sources close to the deal told FinanceAsia. But nothing has been formalised, they added.

Formal roadshows start at the end of March, with the pricing tentatively scheduled for early April, according to a term sheet. CIMB and Credit Suisse are handling the share sale, which could net the Malaysian primary healthcare operator north of $100 million.

Under its platform, Qualitas owns and operates family doctor practices and diagnostic centres for outpatients. The company acquires the practices directly from the doctors. It’s an appealing business model for physicians who own their own practice but often find themselves bogged down in back office work. “If that doctor sells [her practice] to Qualitas, those back-office jobs and funnelling patients through are all done by Qualitas,” a source close to the deal told FinanceAsia. “That allows the doctor to just focus on treating the patient rather than running the business.”

It’s a business model that’s already present in more developed markets. “There are a lot of regional healthcare operators in the US and Australia that try to take the burden off physicians and allow them to focus on what they’re supposed to do — treat patients,” the source said. “That’s taking off.”

Qualitas, which currently operates one of the largest integrated family doctor practice clinics in Malaysia, also has medical centres in Australia, India and Singapore. Proceeds from the IPO will go towards continuing to expand its presence in the region through M&A. It will also look to expand into ambulatory care services.

There will be primary and secondary tranches of the IPO, with private equity firm Southern Capital Group looking to sell some of its 85% stake in the company. (The other 15% is owned by Qualitas Medical Group, the parent company of Qualitas Healthcare Corporation, according to S&P Captial IQ.) The price range and valuation has not yet been set.

Comps? What comps?
As an owner and operator of private family practices and outpatient units, Qualitas does not have any direct comparables in Asia Pacific. The traditional listed healthcare players in the space — Malaysia’s IHH Healthcare, Indonesia’s Mitra Keluarga Karyasehat, Thailand’s Bangkok Chain Hospital, Singapore’s Raffles Medical Group —  operate private hospitals and in-patient services.

One source close to the deal said prospective investors are simply looking at regional hospitals and cutting out the financials around their outpatient units in order to get a more accurate valuation on Qualitas. Some are zeroing in on Raffles’ outpatients division and diagnostics unit and subtracting that from the hospital operator’s total valuation, which is priced at 28.96 times its 2015 earnings, for example. No estimates could be obtained of what Raffles’ valuation might look like minus its outpatient services.

A second source said that some prospective investors are looking at Primary Health Care in Australia. The company, which operators a network for medical centres and pathology units across the country, is currently trading at 19.16 times its 2015 earnings.

Still, the dynamics in Australia are different than in Southeast Asia, and as such, Primary Health Care should not be seen as a direct comp, the second source added.

No valuation has been set for Qualitas, but sources say it will be cheaper than most regional hospitals, many of which are averaging forward EV/Ebitda multiples in the 20s.

The healthcare industry in Southeast Asia is buoyed by rising affluence, a growing middle class, and an ageing population spending more on healthcare. These are all positive factors for related-healthcare companies in the region, and could bode well for Qualitas ahead of its flotation.

Indeed, healthcare operators have outperformed in the past couple of years, although this has left some investors wondering how much upside is left. Hospital operators in Thailand, Malaysia and Singapore were averaging forward EV/Ebitda multiples in the low teens. That average multiple has risen to the low 20s as of year-end 2014.

Bankers and analysts argue the hospital operators should trade at high valuations given they are all expanding so rapidly. Mitra Keluarga, which just raised Rp4.45 trillion ($343 million) in an IPO after selling its shares at the top of the range, will open seven new hospitals across Greater Jakarta and Surabaya. It currently operators 2,000 hospital beds across 11 hospitals.

IHH Healthcare, which operates hospitals in Malaysia, Singapore and Turkey, had plans at the time of its 2012 July IPO to open 3,300 beds over the next five years.

It’s a similar story for Qualitas, which will use proceeds from the IPO to continue its expansion efforts.

“There is definitely still long-term growth [potential] in Asia,” the first source said, noting that most analysts are forecasting high-single digit growth across hospital and primary healthcare operators for the foreseeable future. “Beyond the steady growth trajectory, what healthcare gives investors is stability regardless of what markets are doing, or what the economy is doing. No matter how volatile markets are, people still get sick.”

The hospital operators are generally considered good-quality companies and still have room for growth. But getting investors to keep coming in at such high prices may prove difficult.

 “People are still generally bullish on Asean healthcare as a theme, but it’s not the cheapest sector right now,” the second source acknowledged. Many will be watching to see how Mitra performs in the aftermarket once it starts trading on March 24.

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