IHH Healthcare Bhd - CGS-CIMB Research 2018-07-13: Marking Another Milestone

IHH Healthcare Bhd - CGS-CIMB Research 2018-07-13: Marking Another Milestone IHH HEALTHCARE BERHAD SGX:Q0F

IHH Healthcare Bhd - Marking Another Milestone

  • IHH confirmed the proposed Fortis acquisition via both new shares and open offer (at Rs170/shr) for a total 57.1% stake at Rs73.49bn consideration(RM4.3bn).
  • We believe this is a fair deal at 22x FY3/18 EBITDA, with synergies and value to be unlocked overa 18-24 months’ transition period.
  • Keep ADD call and RM6.86 Target Price for now, pending more details from afternoon briefing.

Fortis, confirmed!

  • On 13 Jul 2018, IHH announced
    1. the proposed subscription of 235.3m new equity shares in Fortis Healthcare,
    2. mandatory open offer for the acquisition of up to 197m Fortis shares, and
    3. mandatory open offer for the acquisition of up to 4.9m equity shares of Fortis Malar Hospitals (Malar).
  • Under the share subscription agreement with Fortis, the proposed subscription of 235.3m new shares at Rs170/share (RM9.98) represents approx. 31.1% of the expanded voting share capital, for a total consideration of Rs40bn (RM 2.3bn). This report is shared at SGinvestors.io.
  • IHH will also acquire up to 197m Fortis shares under the open offer scheme at the price of not less than Rs170 per share, representing 26% of the expanded voting share capital. Total consideration amounts to approx.Rs33.49bn (RM2bn).
  • Assuming full acceptance of the Fortis open offer and proposed subscription, IHH will own approx. 57.1% of the expanded voting share capital, thereby triggering the open offer for Malar (Fortis indirectly holds 62.4%). The Malar open offer, subject to the completion of the Fortis open offer (but not to any minimum level of acceptance), comes at a price of Rs58/share for a total consideration payable of Rs290m.
  • All the offers above will be satisfied entirely in cash, of which RM2.7bn will come from IHH’s internally generated funds and RM1.6bn from external borrowings.

Quality assets at fair valuation

  • We had earlier highlighted how Fortis is attractive to IHH, based onits extensive presence, integrated healthcare service offerings and alignment with IHH’s brownfield strategy. The healthcare services industry in India also provides significant opportunities given the large, but underinsured, population, improving GDP per capita and underserved needs.
  • For FY3/18, Fortis reported an EBITDA of Rs4,129m and recorded Rs4,300m on average over the past 3 years. It was profitable in FY16-17 before incurring a net loss of Rs10.1bn (RM597m) in FY18. The offer price implies a 22x EBITDA, above IHH’s trading valuation of 20.9x FY18F EV/EBITDA. Fortis has a net gearing ratio of 0.34x as of end-FY3/18.
  • Management believes this acquisition could offer much synergy and value to be unlocked, starting from reduced rental leakage and financing costs, to fixing procurement and backroom functions. However, we expect a transitional phase of 18- 24 months prior to high growth trajectory.
  • We are also mindful of the investment risks in India, including FX exposure, possible future impairment and any adverse change in political, economic and regulatory conditions in India.

Turnaround pace of GHK (and now Fortis) remains key

  • Assuming the completion of the total 57.1% stake acquisition by end-2018 and the new management’s ability to halve FY3/18 losses (with other forecasts unchanged), we estimate this could lead to c.8% increase in FY19F EBITDA but a c.15% decrease innet earnings in FY19F. We forecast IHH’s net gearing to rise from the current 2.8% toabout 22% by end-18.
  • However, based on annualised 2019 Bloomberg consensus numbers of RM355m EBITDA and RM105m net profit for Fortis respectively, this would result in a 12% higher FY19F EBITDA and 6% higher FY19F net profit for IHH. This report is shared at SGinvestors.io.
  • We maintain our ADD rating and SOP-based Target Price of RM6.86 for now. An analyst briefing with more details of the acquisition is scheduled for this afternoon. 
  • Key near-term catalysts for the stock include continual earnings turnaround of Gleneagles Hong Kong (GHK) and successful de-risking of the group’s Turkey exposure.
  • Downside risks include poor overseas execution, unfavourable FX movements and regulatory changes.

NGOH Yi Sin CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-13
SGX Stock Analyst Report ADD Maintain ADD 6.860 Same 6.860