KUALA LUMPUR (April 20): IHH Healthcare Bhd's attempt to bid for India's Fortis Healthcare Ltd has been viewed positively by analysts as an avenue to grow its footprint in India.
Following the announcement of IHH issuing a supplementary, non-binding letter to the board of Fortis yesterday, RHB Research analyst Michelle Fong believes that the bid for Fortis will continue given its plans to grow its footprint in India.
Note that IHH has expressed its interest to invest up to INR40 billion (RM2.35 billion) in Fortis through a preferential allotment of equity shares at a cap price of INR160 per share.
"We understand that Fortis' board would be forming a committee to assess binding bids and make a recommendation by April 25. This suggests that IHH's non-binding offer is out of the running," said Fong in a report today.
She views Fortis' hospital assets to be strategic for IHH's plans to grow its footprint in India, but the risk is for it to enter into a bidding war in order to secure a strategic stake.
Noting that India is IHH's fourth home market after Malaysia, Singapore and Turkey, Fong believes that IHH would continue to seek out growth opportunities in India and extend its footprint in areas where it does not already have a presence, such as North India.
"Given strong secular growth trends in the country, expectations for the country's healthcare expenditure to grow at 17% compound annual growth rate (CAGR) from 2011 to 2020 and generate revenue of US$280 billion by 2020," said Fong.
While Fong highlighted that the risk for IHH is to overpay in its bid to secure a strategic stake, she, however, believes that IHH has strong board and management discipline of not overpaying for acquisitions.
"It also has a proven track record of being able to integrate and turn around its acquisitions, case in point being Global and Continental Hospital assets in India, which were acquired in 2015," Fong added.
Concurring with Fong, PublicInvest Research analyst Nor Asilah Amran views the proposal as positive, should IHH eventually be considered. She maintains her view that striking a deal with Fortis would strengthen IHH's presence in the region, in addition to its existing Continental Hospital and Global Hospital chains.
"We are confident over IHH's deep experience in improving profitability of hospitals, through strategic decisions in enhancing revenue and management of costs," said Nor Asilah.
She noted that IHH reported earnings before interest, taxes, depreciation and amortisation (EBITDA) margin of 5.5% for IHH's India subsegment in 4QFY17, compared to EBITDA loss in 4QFY15 when the hospitals were just acquired.
"This was also on the back of higher revenue, which has improved by more than three times over the two years," she said.
Though the two hospital networks are much smaller in comparison to Fortis, PublicInvest believe that a similar approach to restructuring the hospital management and operations would greatly benefit Fortis and lead to higher profitability level, which should also be derived from the hospital chain's large scale.
Both RHB and PublicInvest maintained their buy and neutral calls as well as target prices of RM7.00 and RM5.79 respectively.
At 11.04am, shares in IHH were down two sen or 0.33% at RM6.08 for a market capitalisation of RM50.34 billion.