Fortis boost for IHH seen

Healthcare group to benefit if it can turn around India firm

PETALING JAYA: IHH Healthcare Bhd will be able to reap mid-tolong-term benefits from its acquisition of Fortis Healthcare – if it can integrate and turn around the India-based healthcare firm.

RHB Research noted in a report yesterday that Fortis is currently a loss-making company.

“Acquiring Fortis should provide a significant boost to IHH’s footprint in India, allowing the company to become the second largest hospital group in the country by revenue and earnings before interest, tax, depreciation and amortisation (EBITDA).

“The 170 Indian rupees (RM10.04) per share offer price is at a 19.5% and 15.3% premium to Fortis’ closing share price on July 12 and 60-day volume weighted average price,” said the research house in a report yesterday.

RHB Research said the acquisition values Fortis at RM5.2bil or 22.3 times its 2018 earnings value/ EBITDA.

“We deem the valuation fair, given the scarcity of the asset, even though it is at a 12% premium to the Asian regional healthcare peer average 2018 earnings value/ EBITDA valuation of 20 times.

“The deal is expected to be completed by the fourth quarter of 2018 and should not impact our 2018 forecast. Assuming 2019 and 2020 consensus earnings estimates for Fortis, the acquisition should lift our 2019 revenue and EBITDA by 20% and 23%; and 2020 revenue and EBITDA by 11% and 12%; and our discounted cashflow-based target price by 3% and 5% for the two years.”

CGSCIMB meanwhile said it might take as long as two years for IHH to see any “high-growth trajectory”.

“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 to 24 months prior to high growth trajectory.

“We are also mindful of the investment risks in India, including foreign exchange exposure, possible future impairment and any adverse change in political, economic and regulatory conditions in India.”

MIDF Research said it was maintaining its 2018 to 2019 earnings forecast for IHH.

“As the acquisition is due to be completed in the fourth quarter of 2018, we are making no changes to our 2018 earnings at this juncture.”

As for 2019, the research house said it is lifting its earnings by 7.8% to account for the contribution coming from Fortis. MIDF Research said it was expecting high depreciation and amortisation cost to come in from the newly-opened Gleneagles Hong Kong and Acibadem Altunizade, as well as higher interest expense from the acquisition to offset earnings contribution slightly.

“The key risks to our earnings are delay in opening of new hospitals, longer-than-expected gestation period for new hospitals, lower-than-expected inpatient admissions and revenue per patient, as well as increasing cost of operations.”

IHH announced last Friday that it is acquiring a 31.1% controlling stake in Fortis through a RM2.35bil subscription to a preferential allotment of Fortis shares.

The preferential allotment would trigger a mandatory cash open offer for 26% equity interest in Fortis at an offer price of RM10.04 per share.

IHH shares closed one sen up to RM6.01 yesterday.