This article first appeared in The Edge Financial Daily on April 10, 2019
IHH Healthcare Bhd
(April 9, RM5.56)
Reiterate underperform with a target price of RM5.15: IHH Healthcare Bhd does not see significant risk from auditors’ qualified opinion on Fortis in terms of additional provisions. IHH explained that steps and measures had been taken which included reviewing and improving financial reporting processes and enhancing authorisation levels for payments or transfer of funds within the group. With the blessings from the Securities and Exchange Board of India, Fortis has taken steps to recover dues from former controlling shareholders to the tune of RM265 million to RM275 million, of which the group is confident of recovering. Elsewhere, IHH has initiated an independent forensic audit on the operations of Fortis, which is expected to be completed before Dec 31.
Based on IHH’s impairment testing of goodwill over Fortis on Dec 31, 2018, there is no impairment required. They will perform the next annual impairment testing of goodwill over Fortis towards end-2019.
In view of the ongoing investigation, Fortis’ auditors are unable to ascertain the quantum of both divergence of funds and the adjustments required to the financials. Since IHH acquired Fortis in November 2018, there has been no further finding that requires additional adjustments to Fortis’ financial accounts. However, we remain cautious about Fortis in terms of additional findings, which could pose risk in terms of provisions.
Plans currently under way to recapitalise US$250 million (RM1.02 billion) existing subordinated loans will help reduce the non-cash foreign exchange (forex) loss related to non-Turkish lira borrowings. IHH has indicated that Bank Negara Malaysia had given the green light and is now waiting for the formal approval. Subsequently, IHH will have remaining US$430 million of debt denominated in US dollar and euro and is looking to refinance the debt. When refinancing it, they are looking to swap the 50% of the US$430 million into local Turkish lira (US$200 million to US$250 million into lira) and the remainder to be refinanced into either US dollar or euro. While we see the repayment of the entire non-Turkish lira debt as a positive, which is expected to reduce swings in forex translation, this, however, comes with the drawback of a higher interest rate.
Looking ahead, over the medium term, IHH is expected to face tough operating conditions on the back of: i) uncertain Turkish lira, which has depreciated significantly against the US dollar, euro, and ringgit with continued volatility; and ii) execution risk at Fortis as well as uncertainty over its timeline in terms of a turnaround to profitability. — Kenanga Research, April 9