IHH Healthcare (IHH MK) - DBS Research 2018-03-20: Double Down In India?

IHH Healthcare (IHH MK) - DBS Vickers 2018-03-20: Double Down In India? IHH HEALTHCARE BERHAD Q0F.SI

IHH Healthcare (IHH MK) - Double Down In India?

  • DealStreatAsia reported that IHH had submitted a bid to acquire a controlling stake in Medanta, a multi-specialty hospital in Gurgaon, India. The said offer values the hospital at Rs5,500 to Rs5,700 crores (US$843m to US$873m), around 12% to 27% below the potential IPO valuation a year ago.
  • Temasek (currently owns 18%) is reported to likely submit a competing bid in a few weeks, contrary to previous news reports that it was looking to divest its stake.
  • Reasons that IHH is potentially interested in Medanta :
    1. hospital is in Gurgaon, North India, a location where IHH is interested in,
    2. hospital has complementary medical specialisation expertise with IHH. 
    • However, the key to a potential deal depends on the acquisition price and whether IHH is able to obtain control, in our opinion.

What's New

News sources have reported that IHH has submitted a bid to buy a controlling stake in India’s Medanta. 

  • Just a week after news reported of IHH’s interests to acquire Fortis Healthcare, DealStreatAsia today reported that IHH had submitted a bid to buy a controlling stake in India’s Medanta which values the hospital at Rs5,500 – Rs5,700 crores (US$843m to US$873m), some 12% to 27% below the initial valuation which the founder Trehan was looking at a year ago via a potential IPO (Rs6,500 crores to Rs7,500 crores; US$1bn to 1.2bn) before headwinds hit the healthcare industry in India (price cap for cardiac stents and knee caps, demonetisation, and GST).

Temasek is said to be interested to submit a bid too. 

  • In Feb18, it was reported that IHH was interested to acquire Carlyle’s (27%) and Temasek’s (18%) stakes in Medanta.
  • The founding partners (Trehan family and co-founder Sunil Sachdeva) and other promoters own the remaining 55% stake. However, according to this latest news report, Temasek is also likely to submit a bid in a few weeks for a majority stake in the hospital.
  • Carlyle Group had previously bought its 27% stake at Rs 960 crores in 2013 (implied total value of the group: Rs3,550 crores) while Temasek acquired its 18% stake for Rs654 crores (implied total value: Rs3,700 crores) in 2015.

Ballpark estimated valuation appears higher than Fortis Healthcare or Apollo Healthcare. 

  • As numbers / details are scarce, based on ballpark estimates, the offer price translates to approximately Rs4.4 crore per bed vs Fortis Healthcare’s EV of Rs2.2 crore per bed (at current price) and Apollo Healthcare’s Rs2.1 crore per owned bed.
  • Medanta is a 1,250-bed multi-super speciality hospital in Gurgaon known for cardiac, liver and kidney transplants. Medanta is one of India’s largest multi-super specialty institutes located in Gurgaon with 1250 beds. It also owns 4 other flagship hospitals / medical clinics in Gurugram, North India and 2 partnership hospitals / medical clinics in Delhi, North India. The hospital is known for carrying out cardiac, liver and kidney transplants.

Our View 

  • We list below potential reasons why IHH could be interested in Medanta.
    1. The hospital is located in Gurgaon, in the National Capital Region of India where IHH currently does not have a presence. Gurgaon has the highest per-capita income in India. Most major healthcare players in India has a presence in Gurgaon.
    2. Medanta was founded by a cardiac surgeon known for performing heart, liver and kidney transplants which complements IHH’s current operations in India via Global and Continental Hospitals.
  • However, potential reasons that may deter IHH from acquiring a stake include
    1. high acquisition price / valuation, and
    2. IHH unable to acquire a controlling stake and control over the operations of the hospital from the promoters.
  • While there is no confirmation of the validity of the news, we can infer that IHH is interested and looking for an acquisition target in India now that valuations have de-rated post headwinds that had hit India’s healthcare sector recently. 
  • Given IHH’s track record with Global and Continental Hospitals, a potential acquisition could expand IHH’s presence and operations in India to greater heights. However, integration costs could weigh on potential earnings growth in the near-term.

IHH – Maintain BUY, Target Price RM6.81. 

  • We maintain our BUY rating on IHH with a Target Price of RM6.81. We remain positive on IHH’s growth plans, with a pipeline of new hospitals in China and a potential turnaround in India. 
  • We believe the ramp up in Gleneagles HK could offset some start-up losses in China and lead IHH into its next growth phase. IHH’s medium-term outlook is bright while it rides out its near-term gestation period for the new hospitals.
  • The key catalysts are:
    1. shorter-than-expected gestation period for Gleneagles HK and other new hospitals,
    2. better-than-expected organic performance, and
    3. positive developments in new markets such as India.

Rachel Lih Rui TAN DBS Vickers | Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2018-03-20
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 6.810 Same 6.810