This article first appeared in The Edge Financial Daily on May 6, 2019

IHH Healthcare Bhd
(May 3, RM5.52)
Maintain outperform with a target price of RM6.96: IHH Healthcare Bhd was served with qualified opinion on its financial year 2018 (FY18) financial statement, with regard to its 31.1% shareholding in Fortis. Matters brought up by the auditors were known to IHH prior to the acquisition and IHH has addressed the matter by taking several measures which include: i) reviewing and improving Fortis’ operational and financial processes; ii) reviewing Fortis’ borrowings; and iii) enhancing the authority level of fund transfer and payments within the Fortis Group.

Additionally, IHH will also conduct impairment test for goodwill on the Fortis acquisition annually. Results of the previous impairment test showed that no impairment was required for FY18 as the ongoing legal case has no operational impact on Fortis.

After gaining board control of Fortis, IHH has implemented a 100-day turnaround plan for Fortis. At the time of writing, Fortis has achieved several operational milestones. IHH paid off part of Fortis’ borrowings and renegotiated for lower interest rates for its outstanding loans (from around 20% to around 11%).

The group also completed the acquisition of RHT assets in January, reducing clinical establishment fees by 270 billion rupee (RM160 million) at Fortis level. Fortis also benefitted from the synergies developed with IHH as it can now procure machineries and medical equipment at a lower cost considering that IHH has stronger bargaining power as a hospital chain with a network of approximately 80 hospitals.

The mandatory open offer for IHH to acquire another 26% stake in Fortis still stands, despite the Supreme Court of India previously ordered status quo on the sale of Fortis to IHH. We understand that the court has heard from all parties in the last hearing on 11th April. Fortis pleaded that the mandatory open offer is the rights of the shareholders and it should not be compromised. We remain optimistic about the status quo order to be lifted by the Supreme Court of India in near term, considering that the dispute is only between the Singh brothers and Daiichi Sankyo, and neither Fortis nor IHH is involved. Once the status quo order is lifted, we can expect IHH to proceed with the 26% mandatory open offer, which would ultimately bump their stake in Fortis to 57.1% upon completion.

Acibadem had outstanding debts of US$680 million denominated in US dollars and euros. As the Turkish lira continues to weaken over the years, IHH’s forex losses have also been on the rise. As such, the group restructured the borrowings in order to minimise their forex exposure. As part of the debt restructuring plan, IHH will repay US$250 million of the loan and refinance the remaining portion of US$430 million. Approximately US$200 million to US$250 million of the remaining loan will be refinanced into lira-denominated loans, while the remainder of approximately US$180 million to US$230 million will be refinanced into either US dollar- or euro-denominated loans. Bank Negara Malaysia had previously granted approval to carry on with the restructuring. We note that the repayment of US$250 million portion was completed in mid-April this year. We understand that Acibadem’s foreign patients generally pay in US dollars and this accounted for about 17% of its FY18 (about US$150 million) revenue, which provides a natural hedge against the fluctuation of the lira. — PublicInvest Research, May 2