Analysts positive on IHH Healthcare’s plan to acquire Fortis

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KUALA LUMPUR (July 16): Analysts are positive on IHH Healthcare Bhd's bid to acquire a controlling stake in India's Fortis Healthcare Ltd, saying it will enable IHH to turn Fortis around, which is currently loss-making.

IHH is acquiring a 31.1% stake in Fortis at 170 Indian rupees per share for a total consideration of 40 billion Indian rupees (about RM2.35 billion), through a preferential allotment and a mandatory open offer for up to 26% voting share capital of the company. Subsequently, IHH will make a mandatory open offer for up to 26% interest in Fortis Malar Hospitals Ltd, as required under the Indian Takeover Code.

In a note today, RHB Research analyst Michelle Foong said IHH’s initial strategy post completion of the acquisition is to first stabilise Fortis and then to turn the company around via debt restructuring and ramping up of its operations.

Foong said management is of the view that it could reduce funding costs by 2% to 4% and narrow the 5% to 6% hospital margin differential between Fortis and peers in India, through its various initiatives.

“Over the mid- to longer term, IHH would potentially need to raise further funding for the privatisation of RHT Health Trust and buyout of SRL Diagnostics’ private equity minorities.

“Management expects to keep the listing status of both Fortis Healthcare and Fortis Malar Hospital. It is also looking at the possibility of consolidating Fortis’ accounts with IHH’s, given management’s ability to exercise control on the company’s operations and majority board representation,” Foong said.

The research house, which maintained its “Buy” recommendation with an unchanged target price of RM7 on IHH, said acquiring Fortis should provide a significant boost to IHH’s footprint in India, allowing the company to become the second largest hospital group in the country by revenue and earnings before interest, tax, depreciation and amortisation (ebitda).

Meanwhile, Hong Leong Investment Bank Research (HLIB Research) analyst Sheikh Abdullah said the acquisition marks IHH’s entry into northern India where it was previously absent, and manifests a transformational opportunity to widen IHH’s presence in its 4th home market.

Considering India’s public healthcare system is relatively underfunded and insurance penetration rates are low, Sheikh said this move presents an extremely scalable opportunity of ready brownfield assets ripe for expansion in the most underserved healthcare infrastructure region in India.

“We are positive on this acquisition and appreciate IHH’s track record of turning around assets and improving operational performance.

“However, we note that the gestation period for this acquisition remains opaque at this juncture, amidst the backdrop of regulator investigations into alleged fraudulent transactions at Fortis,” he said, hence maintaining HLIB Research's “Hold” rating on the counter, with a target price of RM6.33.

At 10am, IHH’s shares remained unchanged at RM6 with 23,700 shares traded, giving it a market capitalisation of RM49.47 billion.