Taking a snapshot view at upcoming IPO of Fullerton Healthcare Corporation Limited

Source: Company's prospectus

Fullerton Healthcare Corporation Limited, a Singapore-based integrated enterprise healthcare solutions firm targeted towards the Asia-Pacific region is set to launch in Initial Public Offer (IPO) in October 2016. It is setting its sights for the Singapore Exchange (SGX) mainboard listing, and has lodged its preliminary prospectus on September 28, 2016. As of September 28, the firm served over 25,000 corporations, directly or through its insurer clients, across the Asia-Pacific region including Singapore, Indonesia, Australia, and Hong Kong. It clients comprise of multinational corporations (MNCs), large local enterprises, small-and-medium enterprises (SMEs), and government organisations. It also currently serves over ten million lives under its client contracts.

The IPO offer

The company is offering 140.33 million shares at an expected IPO offer price of S$1.73, and this will bring a total market capitalisation of the company to be around S$1.285 billion. The sole issue manager is JP Morgan. The joint bookrunners and underwriters are comprised of JP Morgan, UBS, Credit Suisse, and DBS Bank.

Business Segments

The company is organised into two business segments, namely Enterprise Healthcare Services, and Specialty Services.

Source: Company's prospectus
Source: Company's prospectus

Fee arrangements

The company noted that it enters into two types of fee arrangements, namely fee-for-services plans and retainer plans. Under the fee-for-services plans, which constitutes a significant portion of its client contracts, the clients agree to pay for a fixed negotiated rate per service utilisation based on the type of healthcare service rendered such as general practice consultations, specialist consultations or physiotherapy treatments.

Under the retainer plan, the company provide healthcare services within an agreed scope of medical coverage for a fixed fee for a specified period.

How will the fee arrangements be impacted by the revised ethical codes

In a revised Singapore Medical Council (SMC) Handbook Ethical Code and Ethical Guidelines released in September 2016, it stipulates that all medical professionals and members participating in legitimate managed health and insurance systems to exercise caution towards any financial constraints or pressures inherent in such schemes that might influence the objectivity of the clinical judgement in managing patients, thus compromising the standard of care expected.

These set of revised guidelines is likely to put a spotlight on the fee practices offered by managed healthcare providers like Fullerton Healthcare. We think that as long as the fee arrangements are properly defined, and disclosed in a transparent manner, we believe that Fullerton Healthcare is able to manage well on the issues.

Use of proceeds

The company estimated that the net proceeds at an expected offering price of S$1.73 will total approximately S$227.8 million, excluding any discretionary incentive fees and assuming the over-allotment option is not exercised.  Of the $227.8 million, $148.4 million will be due to the company.

The firm will then use the net proceeds to do the following:

  • To fund potential acquisitions (S$80.0 million).
  • To fund its proposed investment in Fullerton China (S$20.0 million).
  • To fund its proposed investment in the Bideford Road Building, a freehold mixed commercial and residential building in Orchard Road. (S$40.0 million).
  • To pay off other general corporate and working capital purposes, together with underwriting commissions and offering expenses (worth approximately S$20.9 million in total).

Key Financials

A summary of Fullerton Healthcare’s key financial information is found below:

Fullerton Healthcare Corporation Limited
All dollar amounts are in S$ millions Financial year ended 31 Dec Six months ending June 30
2013 2014 2015 2015 2016
Revenue 75.9 163.8 240.6 109.9 147.4
Yoy (%) growth 115.8% 46.9% 34.1%
EBITDA 8.6 25.4 41.8 16.3 26.3
EBITDA margins 11.3% 15.5% 17.4% 14.8% 17.8%
Yoy (%) growth 36.9% 12.0% 20%
Finance costs 0.2 0.5 3.3 1.0 2.6
EBITDA/Interest 43.0 50.8 12.7 16.3 10.1
Profit attributable to shareholders (1.2) 1.8 (12.4) 0.3 0.4
Net profit margins (%) -1.6% 1.1% -5.2% 0.3% 0.3%
Net cash in operating activities 3.0 13.9 31.0 (0.5) 15.1

Source: Company's prospectus

Revenue growth for six months ending June 30

The 34.1 per cent yearly growth in total revenue for six months ending June 30, 2016 is driven by acquisitions in Singapore, Australia, and Indonesia. The company completed its acquisitions of RadLink and Orchard Heart Specialist Pte Ltd in 2015 and 2016 respectively. Organic growth from new client contracts has also driven the company’s growth.

Revenue growth for full year ending December 31

The 46.9 per cent yearly growth in total revenue for full year ending December 31, 2015 was driven by an increase by the increase in the number of new client contracts awarded under the medical benefits management services (MBMS) business in Singapore in 2015, and acquisitions made in Singapore, Hong Kong, and Indonesia. However, revenue growth was partially offset by declines in its occupational health services businesses in Australia, the slowdown of the Australian economy, and a decline in the Australian dollar against the Singapore dollar.

Free cash flow and debt ratios

Free cash flow calculations

Fullerton Healthcare Financial year ended 30 Dec Six months ending June 30
Calculation of free cash flows 2013 2014 2015 2015 2016
Net profit attributable to shareholders (1.2) 1.8 (12.4) 0.3 0.4
Add: Depreciation and amortisation 15.0 5.8 3.2 9.1 5.6
Less: Purchase of inventories (0.4) (0.3) (1.0) (0.1) (0.4)
Less: Capital Expenditures (11.5) (10.9) (9.5) (17.1) (6.4)
Add: Net Loans 123.3 11.2 0.0 24.5 107.4
Adjustments to free cash flows 126.4 5.9 (7.3) 16.4 106.1
Free cash flow 125.2 7.7 (19.7) 16.7 106.5

Source: Company's prospectus

Although free cash flows (FCFs) fell sharply at the end of 2015 as compared to 2014. However, the six months ending June 30, 2016 rose sharply at 6 per cent increase in FCFs to S$106.5 million from the previous period in 2015. However, without the S$107.4 million net loans received at the end of June 2016, the company could slump into the negative territory for FCF.

Debt ratios

Fullerton Healthcare As of July 31, 2016
S$ millions Actual Adjusted
Loans and borrowings
Secured and guaranteed 1.7 1.7
Unsecured and unguaranteed 46.0 46.0
Senior unsecured and guaranteed bonds 98.1 98.1
Total loans and borrowings 145.8 145.8
Current portion of loans and borrowings 31.2 31.2
Total debt 177.0 177.0
Total Equity 216.2 417.9
Total Capital (Debt and Equity) 393.2 594.9
Total Debt/Total Equity 81.87% 42.35%
Total Debt/Total Capital 45.02% 29.75%

Source: Company's prospectus

The ‘Adjusted’ column shows a scenario where equity capital is raised from the IPO issuance. The company is assuming an issuance of 93.0 million new shares at the assumed offering price of S$1.73 per share, and the issue of 87.33 million new shares as a result of a full-exercise of the Pre-IPO options.

Based on management’s assumptions of raising equity capital through the IPO issuance, it appeared that the debt ratios (both total debt to total equity, and total debt to total capital) have started to fall.

Thoughts on Fullerton’s debt and free cash flows management

We think that management is managing its free cash flows quite well. Although its debt ratios have reduced significantly due to the impact of the IPO issuance, we think that the company will continue to optimise its capital structure, and be able to utilise its IPO proceeds to proceed with the necessary expansion plans.

Despite the improvements in overall debt and free cash flow management, we are concerned on its interest coverage ratios which have been falling from a peak of 50.8 times in FY 2014 to 12.7 times in FY 2015. During the six months ended June 30, 2016, the company’s interest coverage fell to 10.1 times from 16.3 times during the same period last year. We expect global interest rates to normalise soon, and should there be an unexpected rate increase, the company’s ability to manage such scenarios will be severely tested. We hope to see greater improvements in the company’s ability to manage its overall debt levels and interest rate volatility going forward.

Should we invest in Fullerton Healthcare’s IPO

We think that the financials appeared sound, and the company has projected overall growth to be in the range of 4 per cent to 26 per cent, with terminal growth rate at around 2 per cent to 5 per cent. The company has also cited a study done by Frost and Sullivan that the healthcare expenditures as a percentage of gross domestic product (GDP) in the Asia-Pacific region is expected to increase to around 3 per cent to as much as 9.5 per cent in Australia in 2020.

Source: Company's prospectus
Source: Company's prospectus

Thoughts on IPO pricing

On the expected pricing of S$1.73 per share, the company noted that due to its present status as a private limited company, it might be impossible to determine the company’s overall market capitalisation. However, if we were to reference one of its healthcare peers, Raffles Medical Group Limited’s EV/EBITDA multiple of 26 times, the overall enterprise per share for Fullerton Healthcare Group works out to be around S$11.87 per share.

Fullerton Healthcare valuation (S$ millions, unless otherwise stated) 2015
EBITDA 41.80
Diluted share capital (no. of shares) 90.67
EBITDA per share $0.46
Industry median EV/EBITDA multiple 25.75
Enterprise value (EV) per share $11.87

Source: Company's prospectus and own estimates

An expected IPO price of S$1.73 is quite a significant discount from the assumed valuation of S$11.87 per share, and we think that there could be room for additional share price growth going forward as the overall healthcare industry grows.

Disclaimer: I currently do not own any pre-IPO or placement shares of Fullerton Healthcare Corporation Limited, but I intend to subscribe the IPO shares if the final pricing is reasonable.

Latest update: The Business Times reported on October 10, 2016 that Fullerton Healthcare Corporation Limited expects to price its IPO shares at S$1.52 per share compared to the indicative price range of S$1.52 to S$1.93 per share.

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