This article first appeared in The Edge Financial Daily on April 18, 2018

IHH Healthcare Bhd
(April 17, RM6.09)
Maintain add with a target price of RM6.86: IHH Healthcare Bhd has confirmed that it last Wednesday issued a non-binding expression of interest to participate in India’s Fortis Healthcare Ltd, with an offer price of up to 160 Indian rupees (RM9.50) per Fortis share, subject to satisfactory completion of due diligence. In the latest twist of events, Fortis board of directors indicated its inability to engage with IHH, citing binding agreements with Manipal Health Enterprises, Manipal Global Health Services, and TPG Asia (private equity firm), collectively known as Manipal-TPG. We think IHH may next take its offer directly to Fortis’ shareholders. While Fortis founders’ stake has declined to less than 1% from 34.4% previously, Yes Bank emerged as the single largest shareholder with a 17% stake, according to news reports.

Recall also that Fortis had earlier offered to buy the entire portfolio of hospital assets from RHT Health Trust for 46 billion rupees, conditional upon consent from RHT bondholders. We believe IHH’s offer will not only provide the necessary financing for this asset purchase, but also present a clearer exit option for Fortis’ minority shareholders. Fortis is the second-largest private-hospital chain in India (after Apollo), with over 41 healthcare facilities and approximately 4,800 operational beds, based on its financial year 2017 (FY17) annual report.

We think Fortis appeals to IHH due to its extensive presence, especially in northern India, sizeable hospitals with expertise in niche/complex care, and alignment with IHH’s brownfield strategy. IHH entered the India market in 2015, when it bought 51% of Continental Hospitals for three billion rupees, and 74% of Global Hospitals for 12.8 billion rupees. Given that India is its fourth-largest healthcare market, we believe IHH is keen on expanding its footprint there, backed by its recent issuance of US$500 million (RM1.95 billion) perpetual securities. If IHH is successful in acquiring a controlling stake in Fortis, we expect integration efforts to weigh on its near-term profitability, but could unlock greater economies of scale in the medium term. IHH’s global track record and established management team in India would be able to help turn Fortis around, in our view.

We make no changes to our FY18 to FY20 earnings estimates, pending further development on its bid for Fortis. Maintain “add” on IHH as we believe the stock could be rerated on the back of FY18 forecast earnings recovery and continual ramp-up of Gleneagles Hong Kong, with the Singapore and Malaysia operations offering a sustainable earnings base. — CGSCIMB Research, April 16