Quarz Capital Management, Ltd. today sent the following open letter to International Healthway Corp to engage on proposals to unlock a total potential return of >40% in IHC’s share price through the sale of IHC's non-core assets and refocus on key markets .

Dear Members of the Board,

Quarz Capital together with its affiliates have built up a position in International Healthway Corp (the “Company”, “Firm”,” “IHC SP” or “IHC”). We believe that IHC is deeply undervalued despite its plethora of valuable assets with significant upside opportunities. The firm’s stock price has substantially underperformed its potential for a prolonged time period due to its overly aggressive asset acquisition strategy, lack of strategic focus and several execution issues.

LQM E57322We believe that IHC is deeply undervalued despite its plethora of valuable assets with significant upside opportunities. IHC currently trades with a market cap of SGD 101.0 million, at a sharp 48% discount to its intrinsic NAV of SGD 195 million despite its high quality assets.

IHC currently trades with a market cap of SGD 101.0 million, at a sharp 48% discount to its intrinsic NAV of SGD 195 million despite its high quality assets. Its flagship 12 nursing homes with 1,458 rooms in Japan are master-leased to reputable operators under long term contracts in excess of 25 years. Rental rates are subjected to periodic reviews with ‘up-only’ rate adjustments allowed.

This asset generates a combined resilient annual operating income of ~SGD 13 million and has an estimated value in excess of SGD 362 4 million when conservatively valued at a 20% discount to listed healthcare REITs of similar size in Japan (implied cap rate of 3.6%).

IHC’s Australia properties which have been either earmarked or contracted for sale will potentially deliver another SGD 70 million of net cash flow in the second half of 2017 post resolution of the Crest Fund lawsuit.

The company’s Kuala Lumpur 4,725 square meters land bank which is 600 meters away from the sought after prime CBD and retail location of KLCC can be prudently valued at SGD 52 million. IHC’s centrally located Wuxi (China) 165-bed hospital generates an estimated annual operating profit of ~SGD 1 million.

The firm intends to develop this into an up to 1,300-bed Class 3A hospital together with the adjacent land bank. IHC has another land bank in Chengdu (China) which is next to a 1,000-bed public hospital. The firm plans to develop the land bank into a specialist rehabilitation and wellness hospital. We conservatively estimate the value of the China assets at a rock bottom price of SGD 30 million. This is in view of PWC’s inability to ascertain IHC’s contracted independent valuation of the China land banks (ex-hospital) at SGD 88 million.

Our conservative valuation puts IHC’s asset value at SGD 515 million, which represents an upside of 92% to IHC’s current share price. We are convinced that the key reasons for IHC to trade at a substantial discount to its intrinsic value are:

- Loss of confidence by shareholders in IHC’s management and Board of Directors. This can be attributed to the severe drop of IHC’s share price in excess of 85% since its listing. IHC’s development projects have all been substantially delayed with no committed execution timeline. The Crest lawsuit has further increased the skepticism on management’s execution capabilities.

- IHC’s overly aggressive asset acquisition strategy has also resulted in a lack of cash flow to develop its healthcare assets. The higher leverage level has resulted in the firm paying sub-optimally high interest rates versus peers which essentially exhausts most of IHC’s recurring income base. The low cash balance also puts the company in a vulnerable position.

We are surprised at the lack of active steps taken by the current management to address this shareholder value destructive situation despite the multiple levers at their disposal (such as the partial or full sale of valuable but non-core assets). In our view, the directors and management team supported by IHC’s founding shareholders have been provided with an extended period of time since the IPO to create value for shareholders with little results. Immediate actions have to be taken to promote the long-term interest of IHC’s shareholders and to address the undervaluation of IHC’s share price.

LQM E57322We are in support of the new Board of Directors nominations at IHC’s EGM on the 23rd  of Jan 2017.  The EGM is proposed by some of the recent large shareholders to replace the current board of IHC.

We are in support of the new Board of Directors nominations at IHC’s EGM on the 23rd of Jan 2017. The EGM is proposed by some of the recent large shareholders to replace the current board of IHC. These nominees seem to demonstrate diverse skillsets in corporate finance, audit, operations, business development, investment and corporate governance which are highly relevant to IHC.

They are also backed by the substantial shareholders who have significant experience and a successful track record in the development of real estate projects internationally as well as value creation for shareholders.

This expertise is exceptionally relevant to the successful execution of IHC greenfield healthcare asset development projects. We are confident that the newly re-energized IHC will be able to rebuild its reputation, regain the trust of investors and banks, as well as leverage on the vast contacts and expertise of the board and shareholders to expedite on its forward strategy.

We respectfully request the board to consider and implement the following recommendations in 2017- 1H 2018 which we believe will enhance the value of IHC: 

1. REIT - list in Japan (due to the higher valuation) and retain a 10% stake in IHC’s Japan nursing homes asset to release an estimated cash proceeds of up to SGD 325 million. IHC is to be appointed as the asset manager of the REIT (IHC REIT) and grow the REIT’s asset base to increase IHC’s asset management income. 

2. Sale of up to 50% stake in IHC’s KLCC land bank at above SGD 25 million to a JV partner who has the relevant development expertise to jointly develop the land bank with IHC into a medical hub with serviced residences. Stake holding in the project will ensure that the partner’s interest is aligned with IHC to maximize the value of the asset. 

3. Repay and lower the interest rate for a substantial part of the net debt of SGD 320 million with the estimated sales proceeds of up to SGD 420 million (including SGD 70 million of proceeds from the divestment of Australia properties) to lower debt costs. 

4. Utilize the net cash balance of SGD 100 million to fund IHC’s China and Malaysia healthcare development projects. 

5. Consider an IPO of the China healthcare asset in the mid-term to unlock value.

6. Potentially inject the completed and stabilized China and Malaysia healthcare assets (hospitals, medical suites and service residences) into the REIT to release capital for further profitability accretive healthcare development projects. We believe that IHH Berhad (IHH SP) and Parkway Life REIT (PREIT SP) serve as ideal business models for IHC to emulate. 

7. Payout of earnings and unlock capital from healthcare development projects, asset management fees (REIT) and hospital services to reward shareholders.

We are also supportive of the alternative strategy for the full sale of the Japan nursing homes asset to unlock even more financial resources to expedite and focus on the development projects in China and Malaysia.

We are confident that our proposals can provide the required capital for IHC to commit to its core China and Malaysia healthcare development projects which have the potential to become a multi-year profit growth generator for the company, supported by the strong structural demographic and increasing healthcare expenditure per capita drivers. As these projects are executed, we believe that the valuation of IHC will rerate strongly to that in line with other established listed healthcare players in the region.

We are cognizant and will support IHC if the firm is to conduct a rights raising to strengthen its asset-rich but ‘cash poor’ balance sheet until the inflow of proceeds from the sale of its Australia properties and corporate actions.

We hope that the new board will remember the trust that shareholders have vested in them and communicate a transparent strategy for IHC with strong commitment and clear execution timeline as soon as possible.

We firmly believe that the nomination of new directors and the execution of our proposed strategy will provide a clear pathway to deliver a potential return of at least 40% for all IHC shareholders in the near and mid-term. As shareholders, we look forward in participating in IHC current business and future success.

Sincerely yours,

Mr. Jan F. Moermann, Chief Investment Officer, Quarz Capital Management, Ltd.

Mr. Havard Chi, CFA, Portfolio Manager, Quarz Capital Management, Ltd.

Full letter here. 

In comments published in The Straits Times on Sat (14 Jan), IHC executive director Angeleca Lim said that the board is studying the recommendations put forth by Quarz.

"Most of the recommendations are not new and the board and management of IHC have from time to time discussed and considered similar alternatives.

"IHC will continue to evaluate and adopt workable plans that would enhance the company's value. Quarz's assertion that a change of the entire board will drive better shareholder value is speculative."

On Monday (16 Jan), Quarz Capital released presentation slides. Click here.

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#1 Quek nam kee 2017-01-17 08:15
The analysis is very exhaustive and to the point. Thanks

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