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Tuesday, 3 August 2010

Parkway – an expensive investment with good potential, Fortis continues to look for growth in the region

Parkway – an expensive investment with good potential


WITH Khazanah Nasional Bhd potentially forking out a whopping S$3.5bil (RM8.2bil) to acquire all the shares in Singapore’s Parkway Holdings Ltd they don’t already own, is it getting its money’s worth?

On the face of it, one could argue that Khazanah is overpaying. The S$3.95 price per Parkway share is above all analysts’ target prices and a price earnings (PE) ratio of 39 times FY2009 earnings.

Still, Khazanah could be the one laughing all the way to the bank if a few years down the road, Parkway is re-floated on the stock exchange or sold to another party at a much higher valuation.

Parkway is not only Singapore’s premier healthcare provider, it is also Southeast Asia’s largest private healthcare group and has even ventured into India and China.

No wonder then that most analysts had Parkway on a buy call even before this tussle broke out over the last few months.

Parkway’s promise is best surmised by analyst Jaj Singh of UBS. In a February 2010 report, Jaj pointed out that Parkway is in a “sweet spot” as it stands to gain from a number of factors. These are: Asia’s increasingly aging population and the growth in purchasing power of Asian economies.

“Parkway’s expertise, reputation and growing regional footprint puts it in a good position to capture the secular growth of the Asian healthcare market,” Jaj wrote.

That’s a view shared by Winston Lum of AmFraser Singapore, “As Singapore’s premier healthcare player, we remain bullish on Parkway’s long-term fundamentals”.

Singapore itself is Parkway’s key market. Analysts point out that Singapore has the fastest ageing population in Asia. “This would form the backbone of Parkway’s patients,” said a Singapore-based analyst.

It is estimated that currently only about 10% of Singapore’s population is over the age of 60. Analysts estimate that by 2020 that would rise to 30%.

Parkway, which ventured from property development into healthcare in 1987 with the purchase of Singapore’s Gleneagles Hospital Pte Ltd, today operates 16 hospitals in four countries across Asia. It also has a network of general-practitioner clinics, health-screening and professional radiology and laboratory services in Singapore and a few in China.

It operates hub hospitals in Singapore, Malaysia and India, with satellite hospitals or specialist clinics and medical centres that provide intermediate health services. These centres potentially refer patients that need more intensive care or specialist attention back to the hub hospitals, where specialists are based in clusters.

In Malaysia, Parkway operates through two brands, Gleneagles (one in Kuala Lumpur and another in Penang) and Pantai. Parkway owns 40% of Pantai Holdings, which operates nine hospitals in the country.

Singapore remains the key market

In Singapore, where Parkway derives the bulk of its earnings, it operates the Mount Elizabeth, Gleneagles and East Shore hospitals, which have 1,008 beds in total.

Singaporeans make up the bulk of the patients of these hospitals. Analysts put this down to a few factors.
“Singapore has one of the highest GDP per capitas in Asia, which means its citizens have the means to patronise private facilities such as those owned by Parkway,” explains a Singapore based analyst.

He adds that while the Singapore government provides an impressive level of healthcare facilities and services, private hospitals provide the additional attraction of patients being able to choose their own doctors or specialists. Private healthcare also offers better service standards such as shorter waits, he points out.

According to UBS, private healthcare for the wealthy costs only around 28% higher that the fees charged by government hospitals. “This is not a very significant difference for the well-heeled, especially if Parkway continues to provide differentiated services,” says Jaj.

But there is also a significant number of foreigners from neighbouring countries who are flocking to Singapore for their medical treatment. It is estimated that 35% of patients of Parkway’s Singapore hospitals are foreigners. Of this, about 65% are Indonesians, followed by Malaysians at 25%, says one analyst.

Indeed, Singapore’s push for medical tourism is well known, and so is the fact that foreigners who go to Singapore for healthcare because of the high quality of medical facilities and specialists.

And as the wealth of neighbouring countries grow, so too will the fortunes of Parkway’s hospitals in Singapore, analysts say.

The Singapore government is targeting 3% market share of the Asian healthcare market by 2012, up from its 1% share it held in 2000.

Another gem – Novena

Enter Parkway Novena Hospital. This being-built S$1.5bil hospital is one of Parkway’s prized assets. It is coming up on Irrawaddy Road, not far from the upmarket Orchard Road in Singapore and is slated to commence operations next year or by 2012.

It is designed as a luxurious hospital and the first private hospital to offer only single beds. It will have 333 beds.

But it wasn’t too long ago when analysts downgraded Parkway because of its costly venture to start Novena.
In 2008, Parkway had paid a whopping S$1.25bil for the land on which it is now putting up Novena. The price was about two times higher than what the next nearest bidder had offered to pay.

Since then the critics have been silenced. In March, Parkway said all of the 100 units of the first phase of its Novena Medical Suites were sold out at S$3,588 psf, exceeding market expectations.

In a report dated March 29, Lim & Tan Securities said: “The strong response (for its suites) has vindicated Parkway’s aggressive bidding for the Novena site in February 2008 that sent its share price 15% lower to S$2.48.”

The sale of the 100 units, which measured 452 to 1,431 sq ft, is expected to bring in more than S$200mil in revenue in progressive payments, of which 5% is paid upfront as booking fee.

JPMorgan says stronger demand and pricing for the medical suites mean more refinancing options for the S$500mil loan due in July 2011. Parkway has another S$560mil loan due in July 2013.

“A lowering of the cost of capital for the project and the group could result in an accelerated return to restoring Parkway Holdings’ historically higher dividend payouts of 89.3% from FY2003 to FY2007,” says JPMorgan.

Kim Eng Research Singapore says that the sale of half of the medical suites will take care of the entire construction cost.

Deutsche Bank expects Parkway to sell the remaining 159 suites at a higher price of S$3,900 psf in FY2011 and S$4,100 psf in FY2012 versus the average price of S$3,708 psf in phase one.

Overseas expansion

Aside from Malaysia and Singapore, Parkway has also ventured into the burgeoning private healthcare market of India, tying up with Apollo Hospitals, which is India’s largest private hospital group. Parkway owns 49% in the joint venture that runs Apollo Gleneagles in Kolkata, India, which is a 425-bedded multi-specialty hospital.

Interestingly, Khazanah has a 12.2% stake in Apollo Hospitals, which means it is likely that under Khazanah, Parkway should be able to work more closely with Apollo.

Parkway is also building a new hospital in Mumbai. This is a joint venture with a local businessman who is supplying the land while Parkway will do the construction. This is a 500-bed facility in the heart of India’s financial and commerce capital. Analysts expect this venture to do well given the strong demand from one of the largest developing markets with a population of over 1.1 billion.

Parkway also has a small presence in China with six medical and specialist centres with 14 beds. Analysts say that while Parkway is keen to expand its presence in China, getting a licence for a new facility is challenging and attracting local patients, who are used to traditional Chinese medicine, to western medicine remains an uphill task.

Asset light strategy

Another positive aspect of Parkway, say analysts, is the group’s asset light strategy, whereby since 2007, it has injected its Singapore hospitals into a separate listed entity, Parkway Life Real Estate (Preit). The hospitals were leased back on a long-term lease. Parkway owns 35% of the Parkway Life Reit and also receives fees as the manager of the REIT.

The REIT has subsequently acquired nine nursing homes and one healthcare products distribution and manufacturing facility in Japan.

UBS’ Jaj says this strategy enables Parkway to expand without having to leverage up. “In areas where it still needs to take a stake such as in India, it has roped in local partners.”

“We believe management plans to use this asset light framework for most of its future expansion. The proposed sale of the Novena Medical Suites is part of this strategy,” Jaj says.

Interestingly, Singapore-based DMG & Partners Research says that Khazanah’s takeover of Parkway will be positive for Parkway Life Reit. “Parkway Life has indicated that it will be focusing part of its acquisition strategies on Malaysia, which could possibly include the Pantai hospitals. Hence, with Khazanah in control of Parkway (which in turn owns 35.8% of the REIT), we think it will be a positive for the healthcare trust,” DMG’s Lynette Tan wrote in a note this week, recommending a buy on Parkway Life Reit.

Khazanah’s plans for Parkway

According to reliable sources, Khazanah is excited about its impending takeover of Parkway. The sovereign wealth fund, apparently, has moved beyond “a deal mode” and into firming up plans of growing its regional healthcare platform and garnering more synergies from all its healthcare assets. Khazanah has already indicated that if it were to gain control over Parkway that the path would be clear for the creation of Asia’s premium regional healthcare platform via the consolidation of Parkway, Pantai, Apollo Hospitals Enterprise Ltd and IMU Health Sdn Bhd (the latter runs the International Medical University at Bukit Jalil).

Indeed, medical education will be one of the focus areas for Khazanah. “There are education units in all the healthcare assets in the group, which gives them the ability to come up with an attractive value proposition for training of healthcare professionals, from nurses right up to specialist doctors,” says the source. He adds that since the hospitals cover a wide range of countries and levels of specialisation, the ability to move personnel around within the group also gives them an advantage over other standalone operators.

Other synergies should flow from global procurement and developing a team that specialising in putting up new hospitals.

“With control (over Parkway), a lot of these initiatives can be carried out quicker as Khazanah now will have less to contend with other shareholders that have diverse interests in terms of how capital should be deployed for example,” notes an analyst.

While the stage has been set for Khazanah to grow its healthcare business by leaps and bounds with the likely takeover of Parkway, the fund has its work cut out. “There is always the execution risk. Lets see if Khazanah is able to rope in the right expertise and make the right business decisions,” points out the head of research of an investment firm.

In May this year, JP Morgan’s Christopher Gee had written in a report that the risks associated with Parkway related to execution. In particular, the building of Novena Hospital could suffer from cost-overruns and potential delays to completion. He also highlighted operational risks such as lower-than-expected revenues or higher-than-expected costs that limit the group’s growth trajectory.

Fortis continues to look for growth in the region


THE vehicle (Parkway) may have changed but not the vision, according to Malvinder Mohan Singh recently in an interview with India’s Business Standard newspaper.

Malvinder was talking about Fortis Healthcare’s decision to cede control over Singapore’s Parkway Holdings Ltd to Khazanah Nasional Bhd, by accepting the latter’s general offer of S$3.95.

The tussle for Parkway has put Malvinder (right) and Shivinder Singh into the spotlight.
The tussle for Parkway had put Malvinder and his brother Shivinder into the spotlight after they had emerged to take control of Parkway by buying a 23.9% block from TGP Capital in March, which they subsequently increased to 25.3%.

The Singh brothers had said that they had wanted to make Parkway their vehicle to build a global healthcare chain.

It is understood that the brothers had also intended to inject Fortis Healthcare, their Indian healthcare vehicle, into Parkway.

The 30-somethings brothers had in 2008 sold their family’s 35% in Ranbaxy Laboratories to Daiichi Sankyo, Japan’s third largest drug maker, for about US$2.1bil. They used some of that money to buy hospitals in India and then proceeded to buy into Parkway.

In India, Fortis operates 48 hospitals and would build 10 more in the country in the next two years, adding about 2,500 beds.

Besides investments in India, Fortis has a hospital in Mauritius and one in Afghanistan, ‘’but that will change soon,’’ Malvinder said recently. ‘’Our growth in this region will be a mix of organic, inorganic and managing facilities,’’ he said.

Shivinder and Malvinder have a net worth of US$3.2bil, ranking them at 297 in the list of the world’s richest people and among the 20 wealthiest in India, according to Forbes magazine. They also own the Religare group whose operations include wealth management, investment banking and life insurance.

Soon after they bought into Parkway, the brothers set out to gain control of the company, getting four board seats and making Malvinder the chairman.

The brothers stand to gain a gross profit of some S$116.7mil from the sale of their Parkway shares into Khazanah’s general offer. That money, they say, will be used to look for other opportunities.

Shivinder said the group now has between US$800mil and US$900mil in cash and a well-established credit line which could be used for one or more acquisitions, adding that Singapore remained a base for them to grow in Asia.

“For the next five years, Asia is the story,” he is reported to have said.
In the interview with Business Standard, Malvinder said that beyond the S$3.80 price they had bid for Parkway, “it didn’t make any financial sense” for them to raise the price.

“It was a collective decision in the best interest of our shareholders. We are not emotional about our decisions. There is a price point for everything,” he said in the interview.

Malvinder also said that Fortis was not a financial investor and would only wish to drive the businesses that they invest in. He added that selling out to Khazanah has not been a setback as the whole episode was a valuable learning experience. “One would have never understood the business environment, the geo-political issues, competition in other Asian markets by remaining in India,” he said in a media conference.

Fortis officials also recently said they plan to list their pathology unit in India next year and will continue to use Singapore as a base to become a “pan-Asia healthcare leader’’ and has a team scouting for opportunities in the region.

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