Siloam International Hospitals on Thursday kicked off the institutional bookbuilding for its initial public offering, which gives investors their first ever chance to get exposure to Indonesia’s healthcare sector.
The company, which is part of the Lippo Group and the largest private-sector hospital operator in Indonesia in terms of number of beds, is seeking to raise between Rp1.823 trillion and Rp2.311 trillion ($177 million and $225 million).
If successful, it will be the largest IPO in Indonesia year-to-date, ahead of motorcycle and car distributor Mitra Pinasthika Mustika (MPM) and investment company Saratoga Investama Sedaya, which raised about $150 million each. However, the largest Indonesian equity capital markets deal so far this year was the $1.3 billion sell-down in Matahari Department Stores by various existing shareholders led by CVC Capital, which was essentially a re-IPO.
Siloam Hospitals hits the market just days after another Indonesian company – industrial estate developer Puradelta Lestari – decided to pull its IPO after failing to attract sufficient demand. However, the healthcare sector is bound to be viewed as a more exciting investment opportunity, especially since there are already several listed industrial estates in Indonesia.
The $2.1 billion IPO of Malaysia-based IHH Healthcare in July last year showed that investors are definitely interested in the healthcare sector in this region, with more than 400 accounts scrambling to get a piece of that transaction. And that was after a record 22 cornerstone investors had already agreed to take up 62% of the base deal.
IHH’s share price has risen 50% since the trading debut and finished at a new record high of M$4.19 on Wednesday, showing that the demand was not a one-off. Rather, investors have continued to buy up the stock in the secondary market.
Siloam Hospitals is more of a domestic story than IHH, which counts Malaysia, Singapore and Turkey as its core market, but the sector dynamics are largely the same: a large, rapidly growing and ageing population, favourable macroeconomic conditions, rising distributable income, and increasing demand for private healthcare services.
According to Siloam Hospitals’ listing document, this is underpinned by supportive government policies, including the implementation of universal healthcare in Indonesia in 2014, and one of the lowest doctor-to-population ratios in the world.
At present, there are only 0.3 qualified doctors for every 1,000 people, which compares with 1.3 in Malaysia, 1.8 in Singapore, 2.3 in the US and an OECD average of 3.1, data produced by Frost & Sullivan (and quoted in the listing document) show.
Based on the global average ratios of doctors and beds, Indonesia is currently short of approximately 480,000 hospital beds and 267,000 doctors, the business consulting firm notes. This obviously leaves quite a lot of room for growth.
Given the “substantial untapped domestic market opportunity” the company says it does not currently have plans to expand outside of Indonesia.
Siloam Hospitals currently has 14 hospitals in operation, plus another four under construction. In total, it is planning to open six to eight additional hospitals by the end of 2014 and the goal is to have 40 hospitals with a combined capacity of 10,000 beds in five years. At the end of April this year it had a total of 3,436 beds, although that does not include Siloam Hospitals TB in South Jakarta, which opened in June and will have 269 beds when fully operational.
The company has been expanding rapidly since it opened its first hospital in 1996, both through greenfield constructions and acquisitions, and plans to pursue a similar dual strategy going forward. It also intends to continue to expand the number of beds at its existing hospitals.
Siloam Hospitals is looking to sell 162.75 million new shares through the base deal, which will account for 14% of its enlarged share capital. The shares are offered at a price between Rp11,200 and Rp14,200, which translates into a 2014 enterprise value-to-Ebitda (EV/Ebitda) ratio of 19.8 to 24.7 times, based on the joint bookrunner consensus.
That does look a bit pricey compared to IHH and Thailand’s Bangkok Dusit Medical Services, which are quoted at 21.4 times and 17.8 times respectively, according to Bloomberg data. At a market capitalisation of $10.4 billion and $7.1 billion respectively, both of these are significantly larger than Siloam Hospitals, which will have a post-money market cap of between $1.27 billion and $1.6 billion at the time of listing depending on the final price.
However, one source noted that the valuation of Siloam Hospitals takes into account the fact that it will open four new hospitals before the end of 2014.
Bumrungrad Hospital, a smaller Thai hospital operator with a market cap of $2.1 billion, is currently quoted at a 2014 EV/Ebitda ratio of 14.6 times, while India’s Apollo Hospitals Enterprise, which has a market cap of $2.2 billion, trades at an EV/Ebitda multiple of 15.5 times for the fiscal year to March 2015. There are no listed comparables in Indonesia, which is one of the key attractions for investors.
Or as one source put it: “If you want to get involved in Indonesian healthcare then this is the only way to do it.”
Aside from the valuation, another key issue for investors will be the continuing depreciation of the rupiah against the US dollar, which has increased the cost of investing in Indonesia quite significantly compared to just a couple of months ago. The central bank chose to keep its benchmark policy rate unchanged at 6.5% on Thursday after hiking 75bp at the previous two meetings, which could result in further downward pressure on the currency in the near-term.
Investors will be particularly wary about this in light of the long lead-time between the pricing and the trading debut. The institutional offering will close on Friday, August 23, with the final price expected either that day or by the following Monday. However, the stock is not due to start trading until September 10.
Siloam Hospitals’ IPO comes with a 14.3% overallotment option that could increase the total proceeds to as much as $257 million at the top of the price range. All of the overallotment shares are secondary, however, so the additional proceeds will not go to the company. Those shares are provided by parent company Lippo Karawaci, which currently owns 100% of Siloam Hospitals.
Lippo Karawaci is a property developer and aside from being the controlling shareholder, it also leases or sub-leases some of the hospital buildings to Siloam Hospitals. The listing candidate also has a five-year right of first refusal to any property owned or to be acquired by its parent company that is suitable for the construction of hospitals.
It has a similar agreement with Metropolis Propertindo Utama (MPU), which is a shareholder of Lippo Karawaci and also leases some of the current hospital properties to Siloam Hospitals.
According to a term sheet, 20% of the IPO proceeds will be used for opportunistic asset acquisitions, while another 52.5% will go towards capital expenditures. The remaining 27.5% will be used for debt repayments.
There is no pre-determined split between the institutional and the retail tranches and nor between the international and domestic portion either.
Indonesia does not permit the use of cornerstone or anchor investors, but sources said the feedback from investors who have already met the management during the pre-marketing phase suggests that the deal should be in good shape. The roadshow will visit Jakarta, Singapore, Hong Kong and London, and the management will also do some conference calls with global healthcare funds in the US.