TMC Life Sciences Bhd, a private healthcare operator with a medical centre and a fertility centre, has big plans for itself. Major shareholder Peter Lim Eng Hock, who is famed for his timely investments, intends to turn the company into a major player in the medical tourism space within the next four years.

The proposed RM400 million acquisition of Lim’s investment vehicle Best Blend Waterfront Sdn Bhd (BBW), which is to be satisfied fully via a share issuance, will pave the way for the development of the Thomson Iskandar medical hub in Iskandar Malaysia, Johor.

The medical hub to be managed by Thomson International, a subsidiary of Singapore’s Thomson Medical Pte Ltd, will include a 272-bed hospital named Iskandariah Hospital and an outpatient medical centre comprising some 400 clinic suites.

At the same time, TMC Life (fundamental: 2.5; valuation: 0.7) is undertaking the first-phase expansion of its existing hospital, the Tropicana Medical Centre, expected to cost about RM300 million. This will see the hospital triple its number of inpatient beds to 410 from 139 currently.

These concurrent expansion plans are certainly ambitious in scope and have to be done under a tight timeline. For a company that reported only a net profit of RM6.46 million for its latest financial year ended May 31, 2014 (FY2014), the group faces the twin headwinds of long gestation periods and stiff competition in the healthcare sector.

For example, KPJ Healthcare Bhd, which has a market capitalisation of RM4 billion, operates 25 private specialist hospitals and generates billions of ringgit in revenue per year but is trading at earnings multiple of 26 times. In comparison, TMC Life, with two medical centres, reported a revenue of RM88.13 million in FY2014 and yet commands a high earnings multiple of 76 times, presumably due to the impending injection of Lim’s healthcare assets.

On the other hand, the group is expecting exponential revenue growth in the coming years if its foray into medical tourism in Iskandar Malaysia proves to be successful.

TMC Life group chief financial officer Yap Eng Gee tells The Edge that the construction of Iskandariah Hospital will be completed within four years. “The construction of the proposed project will begin by end-2015 and its completion is expected to be by late 2018. However, Thomson Iskandar will start contributing revenue from the sale of clinic suites from 2016 onwards.”

The group’s share price has rallied considerably this year, notching a 25% gain to date. The gains were partly due to the consideration shares to be issued to finance the acquisition of BBW, at 75 sen each or a premium of 17.2% to TMC Life’s last traded price of 64 sen on Feb 5, just before the execution of the sales and purchase agreement.

The exercise entails a proposed bonus issue of 533.33 million shares together with 266.66 million detachable warrants on the basis of one warrant for every two TMC Life shares. Lim owns 70% of BBW and the Tunku Mahkota of Johor Tunku Ismail Sultan Ibrahim, the remaining 30%.

While the 75 sen per share price to finance the deal pegs TMC Life shares at an all-time high, BBW looks to be a value-accretive acquisition. BBW reported an exceptional gain of RM736.6 million for its financial year ended March 31, 2014, following the disposal of freehold land in Iskandar Malaysia, which suggests a substantial cash pile to undertake the Thomson Iskandar project.

The group notes that the estimated gross development cost for the project is RM900 million, with another RM300 million for fixed asset investments, including medical equipment.

“We are confident of the strong potential of Thomson Iskandar and it will be a significant revenue contributor to the group. Hospital Iskandariah will commence operations in 2018,” says Yap.

Be that as it may, the healthcare sector will be facing serious headwinds this year. In a Feb 4 note, TA Securities Research says the implementation of the Goods and Services Tax (GST) in April could raise input cost for private healthcare operators by up to 4%.

Yap says the cost adjustments are manageable. “There is no significant negative impact on the group from the GST implementation.”

Another issue is that the gestation period for new hospitals typically is between three and five years, which suggests that TMC Life will be relying on the sale of its medical suites for its bottom line. However, total revenue should see a significant uptick by the time the group completes the first phase of the expansion of Tropicana Medical Centre, as well as from contributions via Thomson Iskandar.

TMC Life’s burgeoning cash pile goes some way towards justifying the rally in its shares and provides a compelling investment theme. Its cash and bank balances stood at RM190.8 million as at Dec 31, 2014, following the conversion of the company-issued warrants, which had since expired.

The new consideration warrants, if fully exercised, would raise another RM200 million in gross proceeds for the company. Coupled with the assets and cash held by BBW, TMC Life would see a vast improvement in its balance sheet.

In a Feb 6 announcement outlining the proposed acquisition of BBW, TMC Life says its net assets would grow from RM135.39 million as at May 31, 2014, to RM1.34 billion after the completion of the exercise and conversion of the warrants.

As a result, TMC Life’s net assets would amount to 52 sen per share, translating into a price-to-book multiple of 1.36 times, based on the stock’s Feb 12 closing price of 70.5 sen.

At the end of the exercise and upon full conversion of the warrants, Lim’s stake in TMC Life will rise to 78.2% from 68.5% as at Feb 4.

Given that major healthcare stocks such as KPJ and IHH Healthcare Bhd are trading at a minimum of two times their respective price-to-book multiples, some say Lim expects his investment to command a similar premium if his grand vision for TMC Life is realised.  

However, apart from the challenges in the healthcare sector, it remains unclear as to the level of income contribution to be expected from TMC Life’s expansion plans. Its revenue and net income would need to grow exponentially over the next few years if it were to be valued close to that commanded by KPJ and IHH.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on February 16 - 22, 2015.

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