Thursday 28 Mar 2024
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This article first appeared in The Edge Financial Daily on March 16, 2018

IHH Healthcare Bhd
(March 15, RM6.06)
Maintain neutral with an unchanged target price (TP) of RM5.79.
Unofficial reports from India’s Economic Times and a few other news portals suggested that IHH Healthcare Bhd is making a voluntary offer to buy the non-promoter shares of Fortis Healthcare Ltd. The news was unsurprising to us, as IHH has constantly been looking at opportunities to solidify its footing in the Indian region as its fourth home market.

 

Acquisition has always been the preferred way to grow as a healthcare operator in India due to the smoother process and regulations as compared to taking on a greenfield project. Based on our estimates, a 51% stake in Fortis would cost IHH at least RM3 billion, which is likely to be funded mostly by bank borrowings.

Pending IHH’s further clarification on the matter, we retain our “neutral” call with an unchanged TP of RM5.79, pegged at our financial year 2018 blended enterprise value to earnings before interest, taxes, depreciation and amortisation (EV/Ebitda).

Sources said that IHH is unlikely to seek to acquire the promoters’ shares for now, as they currently hold less than 1%. Largest shareholder at this point is Yes Bank, with a 17.03% stake, while the rest is held among public and other institutional shareholders. We understand that due to IHH’s preference for management control, this would not be an easy acquisition as control issues would need to be sorted out.

Based on consensus valuations, Fortis is valued at an average of 194.9 rupees. If IHH were to acquire a controlling stake of 51%, we estimate the company would need to fork out at least RM3 billion to fund the acquisition. As reported in the news portal, this will likely be funded via bank borrowings, as IHH is said to be in talks with banks to tie up financing. Assuming 50% of the RM3 billion is funded through bank borrowings, at 51% stake, the acquisition of Fortis will not be earnings-accretive in the near term, while the cost of borrowings will potentially dilute IHH’s earnings by about 6%, based on our estimates.

We are positive on the news, however, believing that the potential acquisition will further strengthen its foothold in India in the long term, in addition to its existing chain of Global Hospitals and Continental Hospitals. At this juncture, the Fortis Hospitals chain consists of 45 healthcare facilities spanning across India, Dubai, Mauritius and Sri Lanka, with a total of some 10,000 beds and 314 diagnostic centres.

We have confidence on the synergies it may bring as IHH taps the relatively underserved and attractive India market, with a population of more than 1.2 billion, as affordability increases in tandem with a growing middle class. — PublicInvest Research, March 15

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