IHH Healthcare - DBS Research 2018-10-09: Step-By-Step


IHH Healthcare - Step-By-Step

  • IHH raises its stake in Acibadem to 90% (from 60%) by acquiring 15% each from Aydinlar and Khazanah via exercising conversion options.
  • IHH will issue a total of 524m new IHH shares (c. 6% of the enlarged total number of shares) at RM5.59 per share.
  • Implied valuation of c.23x 1H18 annualised EV/EBITDA, similar to IHH/Khazanah’s acquisition of 60% stake in Acibadem in 2011.
  • Paves the way to capitalise the existing subordinate loans of US$250m equivalent and reduces IHH’s exposure to forex impact from Turkish Lira volatility.

What’s New

Aydinlar and Khazanah exercise options to convert Acibadem shares to IHH shares.

  • The founder / Chairman and CEO of Acibadem (IHH’s 60%-owned Turkish hospital), Mehmet Ali Aydinlar and his wife Hatice Seher Aydinlar, have exercised their options to each convert around 15% equity interest in Acibadem Holdings for approximately 262.2m new IHH shares. Concurrently, Khazanah (via its subsidiary Bagan Lalang) has also exercised an identical option. The options were entered into in connection with IHH’s acquisition of a 60% equity interest in Acibadem Holding in 2011.
  • The transaction is pending approvals from Bursa and SGX for the issuance of new shares and approval from BNM.

IHH raises its stake in Acibadem to 90%; implied valuation of 23x 1H18 annualised EV/EBITDA.

  • IHH will issue a total of 524m new shares for the transaction above, approximately 6% of IHH’s enlarged total number of shares, at a market value of RM5.59 per share (based on 5 market day volume weighted average price of IHH shares up to 29 Aug 2018).
  • The conversion of shares falls at the lower end of the range of 262m to 393m IHH shares for each of the 15% equity interest. Following both of the transactions, IHH will own 90% of Acibadem while Mehmet Ali Aydinlar will own the remaining 10%.
  • Based on our ballpark estimates, the implied acquisition price is approximately 23x 1H18 annualised EV/EBITDA, close to the estimated valuation of 21x - 22x when IHH / Khazanah acquired 60% in Acibadem in 2011.
  • Upon completion of the conversion, Aydinlar’s shareholding in IHH will increase from 3.23% to 6.21% while Khazanah’s shareholding will increase from 40.33% to 40.91%. The remaining shareholders will see a dilution of c.6% in total.

~ SGinvestors.io ~ Where SG investors share

Taking steps to reduce IHH’s exposure to Turkish Lira forex impact.

  • We believe this paves the way for IHH to capitalise the existing subordinated loans of US$250m equivalent, and that IHH almost fully owns Acibadem. Post the capitalisation of the subordinated loans, IHH’s exposure to Turkish Lira forex translation losses will reduce by about a third. In addition, the capitalisation of the subordinated loans should alleviate the immediate concerns of the debt covenants impacted by the depreciation of TRY.
  • Management will continue to explore options to further pare down its non-Turkish Lira borrowings and reduce forex translation volatility which includes delaying the capex on 2 new greenfield hospitals in Turkey and potential divestment of non-core assets.
  • While we believe this addresses some concerns of the depreciation of TRY on IHH (potentially positive impact on net profit), this may subsequently raise some questions on succession planning again should Aydinlar (who is now in his 60s) decide to take a back seat in the management of Acibadem. Aydinlar’s contract ends at the end of 2018. However, this is known and management has been preparing for this.

Maintain BUY; Target Price of RM6.35.

  • We maintain our BUY rating with Target Price of RM6.35. 
  • IHH currently trades at 18x FY19F EV/EBITDA, at 1 standard deviation below its historical average. While there may be potential near-term headwinds, we remain positive on IHH’s long-term growth plans as it rides out its near-term headwinds and gestation period for the new hospitals. 
  • With a potential strong platform in India and China, IHH now has exposure to the two largest economies in Asia with the highest growth potential in the healthcare sector. We believe the ramp-up in Gleneagles HK and better economic prospects in home countries such as Malaysia and Singapore could offset some of the start-up losses in China and lead IHH onto its next phase of growth.
  • The key catalysts include:
    1. shorter-than-expected gestation period for Gleneagles HK and other new hospitals,
    2. better-than-expected organic performance,
    3. turnaround in the situation in Turkey, and
    4. positive developments in new markets such as India

Rachel Lih Rui TAN DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2018-10-09
SGX Stock Analyst Report BUY MAINTAIN BUY 6.35 DOWN 6.810