IHH Healthcare (IHH MK) - Maybank Kim Eng 2018-04-17: Cooling Down On Fortis Bid

IHH Healthcare (IHH MK) - Maybank Kim Eng 2018-04-17: Cooling Down On Fortis Bid IHH HEALTHCARE BERHAD Q0F.SI

IHH Healthcare (IHH MK) - Cooling Down On Fortis Bid

Manipal & TPG already have a firm footing in Fortis 

  • IHH Healthcare confirmed that on 11 Apr 2018 it issued a non-binding letter to the Board of Fortis Healthcare (FORH IN; CP INR149; Not-rated) with its interest to participate in Fortis (basically, a bid). 
  • However, Fortis indicated that it has already entered into binding agreements with Manipal Health Enterprises, Manipal Global Health Services and TPG Asia. With IHH’s bid apparently only 3.2% higher, we see a risk of overpaying if it chooses to meaningfully raise, not to mention the short-term operational challenges from legacy issues at Fortis (details below). 
  • We do see long-term advantages in that Fortis could significantly enhance IHH’s position in India, its fourth home market, where it operates 6 hospitals.

Non-binding letter highlighted potential bid price 

  • IHH’s indicated offer price of up to INR160 per Fortis share is at a 7.6% premium to the last trading price of Fortis and indicates a valuation of 19.5x FY18 EV/EBITDA, which is only 2.6% lower than IHH’s FY18 EV/EBITDA of 20.0x. The offer is only 3.2% higher than Manipal’s and TPG’s offer of INR155 per share, as reported by Bloomberg. 
  • Because Fortis has already entered into binding agreements with Manipal and TPG, IHH would have to meaningfully raise its offer and convince the Fortis Board its value proposition is superior, assuming it decides to challenge the binding agreements. We would need to see more compelling benefits to get comfortable with an increase, as our initial calculations show the current bid is only mildly accretive, yet has risks.
  • Financial strength is not an issue, as IHH could fund from internal resources, with cash on hand of MYR6.1b and net gearing 3% as of FY17.

Potential operational challenges in Fortis 

  • Although Fortis’s 45 healthcare facilities could give IHH instant access to a bigger market and make it the second-largest hospital group in India, we are also mindful of several key operational challenges at Fortis, which were highlighted in IHH’s letter:
    1. ongoing investigations by regulators;
    2. tightened credit lines;
    3. complex holding structure;
    4. tepid operational performance vs peers; and
    5. litigation against former promoters. 
  • Our estimates and SOTP-based Target Price of MYR7.00 are unchanged.

Swing Factors



  • Regulatory risks, including caps on healthcare pricing and restrictions on foreign doctors.
  • Strengthening of MYR against SGD and other currencies that lead to translation losses.
  • Geopolitical risks in less-stable emerging markets, such as Turkey, Iraq and UAE.

John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-04-17
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