Cover Story: Growing IHH

This article first appeared in The Edge Malaysia Weekly, on April 8, 2019 - April 14, 2019.

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TOWARDS the end of July 2012, at a meeting with bankers and fund managers in the run-up to IHH Healthcare Bhd’s initial public offering, an executive of a financial institution asked what was so special about the healthcare provider.

“If we throw a few billion dollars, we can recreate IHH,” he said.

In response, IHH’s current managing director and CEO, Dr Tan See Leng, explained that the hardware — the hospitals and equipment — could be acquired but the people — the specialists, doctors and other employees — could not be replicated.

“Where do you get the people?” he asks in an exclusive interview with The Edge late last month, while talking about the barriers to entry into the healthcare sector.

“Merrill (Lynch) was there, Credit Suisse was there, Goldman Sachs, CIMB, DBS, all our backers, (legal firm) Allen & Gledhill, all in, about 100 of them were present [at the meeting] … and today, I’m still saying the same thing,” says Tan, who has helmed IHH since January 2014.

If the executive who had raised the question had subscribed for IHH shares at the time, his investment would have multiplied by now. IHH has gained more than 103% since its IPO, paid out almost RM1.15 billion or 17 sen a share in dividends and churned out RM4.53 billion in net profit since 2013.

And, according to Tan, there is more to come. Using ageing as an analogy, he says, “We (IHH) are now into our twenties. So the road ahead … you know, in your twenties, you will transform — into your thirties, into your forties. When you reach your forties, you would have reached a level where it’s time to take stock and harvest … So today, we’re in our twenties going into our thirties, so if anything at all, I think we’ve only just begun.”

And IHH has been aggressive, to say the least, steadily growing into the behemoth it is today.

The group has under its belt such healthcare brands as Parkway, Pantai, Mount Elizabeth, Gleneagles, a 90% stake in Acibadem Holdings and a 31.17% stake in Fortis, and employs more than 55,000 people and operates more than 15,000 licensed beds across 84 hospitals in 12 countries — Malaysia, Singapore, Brunei, India, China, Turkey, Macedonia, Bulgaria, Dubai, Mauritius, the United Arab Emirates and Sri Lanka.

IHH acquired its 31.17% stake in Fortis Healthcare Ltd in a US$584 million deal in November last year, and the total investment is expected to reach US$1 billion (see accompanying story).

Fortis Healthcare is listed on the Mumbai Stock Exchange in India and at its close of INR136.80 last Thursday, it had a market capitalisation of INR103.28 billion or US$1.49 billion (RM6.08 billion).

Fortis owns 62.71% of Fortis Malar Hospitals Ltd, which is also an Indian publicly traded company and, according to Bloomberg, operates centres for trauma care. Fortis Malar has a market capitalisation of just US$14.91 million (RM60.89 million).

Also last year, IHH upped its shareholding in Acibadem to 90% from 60% as part of a shareholders’ agreement signed when it had first bought into the latter.

Through Parkway Investments Pte Ltd, IHH has a 35.25% stake in Singapore-listed ParkwayLife Real Estate Investment Trust, which, at its close of S$2.91 last Thursday, had a market capitalisation of S$1.76 billion (RM5.3 billion). ParkwayLife REIT houses IHH’s healthcare assets (see chart).

At its close of RM5.60 last Thursday, IHH had a market capitalisation of RM49.11 billion, making it the second largest healthcare operator by market cap in the world.

IHH’s partner in Gleneagles Hong Kong is NWS Holdings Ltd, a unit of the late billionaire Chen Yu Tung’s New World Development Co Ltd.

The group is expected to open a hospital in Chengdu, China, in the second half of the year and one in Shanghai a year later with a total capacity of 350 beds and 450 beds respectively.


Digitalising healthcare

Interestingly enough, Tan says that over the next five years, IHH will be taking its healthcare offerings to a whole different level.

In a nutshell, data from its 84 hospitals and millions of patients — their records, medication, past history and even lab results — will be placed on a common platform with the requisite cyber-security protection and precautions. This will improve IHH’s outreach to patients, enabling it to predict with accuracy and precision when they require intervention and what kind of preventive measures can be taken for them, and the size of the bill that insurance companies can work with.

“In the next three to five years, IHH will have a huge IT arm transforming it into a more digitised and digital healthcare platform because we own 84 hospitals,” Tan says.

This effort may not utilise much in terms of capital expenditure (capex) but it could have a significant effect on the company’s bottom line.

However, amid the effort, IHH will continue with its acquisitions and expansion, and maintain its cutting edge in medical technology.

Tan explains that IHH’s capex is a function of its operating budget every year, comprising replacement capex — which is required to keep a hospital in top condition — and new capex.

Replacement capex can be anywhere between 2% and 3% of top-line operating revenue for a geographical region. For instance, IHH’s revenue in Singapore is over S$1 billion (RM3.01 billion), which means replacement capex in any given year is between S$30 million and S$50 million. The percentage is the same in IHH’s other markets.

New capex, meanwhile, is decided on a case-by-case basis. “It’s a very disciplined way of doing it,” Tan says.

Other than the above, there is also the possibility of IHH unlocking value in some of its assets. “We have plans,” Tan admits.

According to Fortis’ latest annual report, it owns 62.5% of SRL Ltd, which operates pathology laboratories, and offers pathology services and radiology modalities, among others. SRL is India’s largest diagnostics chain and has more than 350 labs and 6,000 collection centres.

In 2016, there was a plan to float SRL’s shares but this did not materialise.

Adding to the drama at IHH, in November last year, state-controlled investment arm Khazanah Nasional Bhd sold a 16% stake in the company at RM6 a share or RM8.42 billion in total to Japan’s Mitsui & Co Ltd as part of an asset rationalisation exercise. After the disposal, Khazanah’s shareholding in IHH has fallen to 26.05% while Mitsui’s, at 32.9%, is just below the 33% threshold, which would trigger a general offer.

“I don’t think there’s any significant impact. I think, thus far, we’ve worked very well with all the shareholders, normally directors on our board. Mitsui has been on the board for a long time, since 2012, from the listing until now,” Tan says of Khazanah’s disposal.


IHH’s earnings

In its financial year ended Dec 31, 2018, IHH registered a net profit of RM627.69 million on revenue of RM11.52 billion. Earnings per share stood at 6.54 sen. Compared with FY2017, earnings were down 35.29% while revenue was up 3.41%.

In its announcement to Bursa Malaysia, IHH said, “On constant currency terms, revenue and Ebitda (earnings before interest, tax, depreciation and amortisation) grew 28% and 33% respectively. However, it is noteworthy that IHH made a RM554.5 million gain from the disposal of its interest in India’s Apollo Hospital Enterprise Ltd, and recognised in 2017.”

In 3QFY2018, IHH suffered a net loss of RM107.07 million on sales of RM2.84 billion. This was attributed to Acibadem’s non-lira-denominated loans, which resulted in IHH recognising a foreign exchange loss of RM752.5 million.

However, adding to its profit for a month or so was IHH’s acquisition of a 31.17% stake in Fortis in mid-November 2018. The consolidation resulted in an increase in revenue and expenses compared with the previous corresponding period (see accompanying story).

Nevertheless, since its listing in July 2012, IHH’s net profit has fluctuated between RM612.4 million and RM969.95 million, largely because of currency volatility.

Tan says, “We’re trying to look for ways and means to rationalise some of the assets (in Turkey). In the medium term, we should be able to reduce (debts by) another US$100 million to about US$300 million. Then, it becomes manageable. Then, you will not see swings, fluctuations in earnings.”

At present, the Turkish lira is trading at about 5.64 to the US dollar but it had risen above 7.0 in August last year.

As at Dec 31, 2018, IHH had cash and cash equivalents of RM7.76 billion, short-term debt commitments of RM9.33 billion and long-term borrowings of RM1.12 billion. Finance costs stood at RM978.82 million.


Fortis issues

Of the analysts who have covered IHH since end-February this year, 10 have positive calls — “buy”, “outperform”, “add” or “overweight” — four have “hold” or “neutral” calls while three have negative calls — “underweight”, “underperform” or “sell”. Two research houses are reviewing their calls.

For example, Credit Suisse has an “outperform” call and a target price of RM6.50 while UBS has a 12-month target price of RM6.60 and a “buy” call.

“At its current price, the stock is trading at a PER of 43.4 times and EV/Ebitda of 16.7 times. Our ‘buy’ rating is premised on earnings growth this year from Singapore and Malaysia operations’ margin expansion; Gleneagles Hong Kong’s operations improving; IHH injecting equity and taking out some foreign currency debt at Acibadem level; and manageable start-up costs from opening the Chengdu hospital.”

A slew of analyst reports were released earlier this month after IHH’s shares took a beating upon external auditor KPMG PLT issuing a qualified opinion on the healthcare group’s financials for FY2018.

The stock fell 4.67% or 26 sen to RM5.31 as 4.9 million shares changed hands. The qualified opinion was the result of an ongoing investigation into Fortis by Indian regulators.

Prior to IHH’s acquisition of its stake in Fortis, an independent external legal firm had submitted a report highlighting certain issues that required Fortis’ reassessment of claims and transactions with possibly related parties.

What happened was that Fortis had investment placements — inter-corporate deposits (ICDs) — with three companies amounting to INR4,450 million (about RM261.2 million), impaired entirely by it in FY2018.

The ICDs were used to repay and grant loans to certain entities, where former directors of Fortis were connected with the former controlling shareholders of the company. The placements, subsequent assignment and cancellation of the assignment were also done without following the usual treasury procedures and Fortis’ treasury mandate, and specific authorisation was not obtained from the former Fortis board.

The third party, to which the ICDs were assigned, filed a civil suit against several entities, including Fortis, in February last year. The Securities and Exchange Board of India issued interim investigation orders after looking at the transactions, and instructed Fortis to take the necessary action to recover INR4,030 million from Fortis’ former controlling shareholders (prior to IHH) and other parties identified.

“The financial impact of the auditor’s qualified opinion has already been provided for in the FY2018 audited accounts,” Tan says of the fiasco. “It is a technical announcement and the information has been disclosed and provided for by Fortis in its FY2018 financial results.

“Since we acquired a controlling stake in Fortis in November last year, IHH has taken steps to address these qualifications together with Fortis. Separately, all the matters raised have been accounted for in the FY2018 financial statements.”


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