IHH Healthcare Bhd - CIMB Research 2018-04-16: Still In The Race For Fortis?

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IHH HEALTHCARE BERHAD Q0F.SI

IHH Healthcare Bhd - Still In The Race For Fortis?

• IHH Healthcare could take its offer for Fortis directly to the Indian company’s shareholders.
• IHH’s initial pure cash offer of Rs160/share (subject to necessary due diligence), could have been the preferred option for minority shareholders, in our view.
• Regardless of Fortis outcome, IHH remains committed to expanding its 4th largest healthcare market exposure. 
• No change to our ADD call and RM6.86 Target Price.

In pursuit of Fortis

• IHH Healthcare confirmed that it had on 11 April 2018 issued a non-binding expression of interest to participate in Fortis Healthcare (FORH IN, Not rated), with an offer price of up to Rs160 per Fortis share, subject to satisfactory completion of due diligence.
• In the latest twist of events, the Fortis Board of Directors has indicated its inability to engage with IHH, citing binding agreements with Manipal Health Enterprises, Manipal Global Health Services and TPG Asia (private equity firm), collectively known as Manipal-TPG.  We think IHH might next take its offer directly to Fortis’s shareholders.
• While Fortis founders’ stake has declined to less than 1% from 34.4% previously, Yes Bank emerged as the single largest shareholder with 17% stake, according to news reports.
• Recall also that Fortis has earlier offered to buy the entire portfolio of hospital assets from RHT Health Trust (SGX: RF1U) for Rs46bn, conditional upon consent from RHT’s bondholders. We believe IHH’s offer will not only provide the necessary financing for this asset purchase, but also present a more clear exit option for Fortis’s minority shareholders.

Why is Fortis attractive?

• Fortis is the 2nd largest private hospital chain in India (after Apollo), with over 41 healthcare facilities and approximately 4,800 operational beds, based on its FY17 annual report.
• We think Fortis appeals to IHH due to its
  1. extensive presence, especially in northern India,
  2. sizeable hospitals with expertise in niche/complex care, and
  3. alignment with IHH’s brownfield strategy.
• IHH entered the India market in 2015, when it bought 51% of Continental Hospitals for Rs3bn, and 74% of Global Hospitals for Rs12.8bn. Given that India is its 4th largest healthcare market, we believe IHH is keen to expand its footprint there, backed by its recent issuance of US$500m perpetual securities.
• If IHH is successful in acquiring a controlling stake in Fortis, we expect integration efforts to weigh on its near-term profitability, but could unlock greater economies of scale in the medium term. IHH’s global track record and established management team in India would be able to help in turning Fortis around, in our view.

Key details of potential offers for Fortis

• 1st suitor: The TPG-backed Manipal Hospitals proposed a demerger of Fortis Healthcare, valuing the group at Rs80.4bn or Rs155 per share. Under this new deal, Fortis shareholders will obtain 13.1 shares in the combined entity for every 100 shares they own.
• 2nd suitor: on 11 April 2018, IHH made a non-binding offer of up to Rs160 per Fortis share in cash for both the hospital and diagnostic business, eclipsing all other offers. Based on Bloomberg consensus estimates, this implies 26.7x forward EV/EBITDA.
• 3rd suitor: Two Indian business families, the Hero Enterprise Investment Office and the Burman Family Office, jointly submitted a binding offer of Rs12.5bn last week, via a two-stage preferential share allotment. They will first invest Rs5bn as fresh equity at Rs156/share, with a subsequent tranche of Rs7.5bn upon the finalising of due diligence. This could bring their combined stake up to 18.6% from the current 3%.
• News reports hint at other interested parties in the pipeline.

FY18F earnings recovery underpins our ADD call

• We make no changes to our FY18-20 earnings estimates, pending further developments on its bid for Fortis. Maintain ADD call on IHH as we believe the stock could re-rate on the back of FY18F earnings recovery and continual ramp-up of Gleneagles Hong Kong, with the Singapore and Malaysia operations offering a sustainable earnings base.
• Downside risks to our ADD call include poor overseas execution, unfavourable FX movements and regulatory changes.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-04-16

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 6.86 Down 7.060