IHH’S hospital sale depends on price

Group deemed not desperate to sell India hospital stakes

PETALING JAYA: The key factor on whether a deal would be struck by IHH Healthcare Bhd to sell its stakes in India-based Continental Hospitals and Global Hospitals will be the price, sources said.

Sources say that other than the price factor, there are strong indications that the IHH management would not be willing to part with these assets at a loss.

“IHH is not desperate to sell these assets but if the option is on the table with the right price then it would surely make sense to consider it. If it is not the right time to sell, then a sale won’t proceed,” the sources said.

“Selling it at a loss is out of the question since

IHH has holding power,” the sources added.

Over the week it had been reported that IHH had initiated discussions to cash out of its 62.2% stake in Continental Hospitals and its 74% stake in Global Hospitals.

India’s Economic Times had reported that IHH may sell them back to the original promoter family at half the cost it had acquired them for in 2015.

Analysts believe IHH is unlikely to settle for a sale of Continental and Global Hospitals at half the cost.

“Agreeing to this deflated price would also indicate that management had not negotiated a good deal on behalf of shareholders. It would also have a bearing on its financials in the immediate term,” said an analyst.

IHH had bought a 51% stake in Continental

Hospitals Ltd for Rm166.73mil in 2015.

IHH had also bought a 74% stake in Global Hospitals for Rm819mil later in the same year.

Both of these hospitals have seen several doctors leaving over the past few years and this had weighed on the performance of both hospitals which were still running at a loss.

According to Macquarie Research, both Continental and Global Hospitals collectively account for 5% of group revenue and they reported an earnings before interest, taxes, depreciation and amortisation (EBITDA) loss of Rm13mil in the first half of 2019.

“In 2018, IHH raised its stake to 62.2% by investing 140 crore rupees (Rm82.6mil) in

Continental’s rights issue. We understand that this hospital sees the IHH management and Gurunath Reddy, the original promoter, having different views. This had caused the departure of key doctors over the years,” Macquarie Research said in its report.

For Global Hospitals, the research house said it was a profitable hospital until the loss of key doctors who specialise in liver transplants and this had weighed on volume.

It noted that IHH had replaced the key doctors and also expanded other medical services for Global Hospitals.

“In the financial year 2018 (FY18), IHH’S stake in Global Hospitals had a total of Rm607mil goodwill, while Continental’s goodwill was fully impaired in FY18,” it said.

“Assuming the deal is done at half of IHH’S purchase price, it is likely to have an impairment loss on goodwill for Global Hospitals and cap the share price performance in the near term,” it added.

Macquarie maintained its outperform on IHH with a sum of total parts derived target price of RM6.44 per share that implies an 18 times enterprise value to EBITDA.

Kenanga Research in its report said that a sale would be mildly positive to IHH considering that the removal of losses at both Global and Continental is expected to help reduce the overall losses in India which had continued to widen in the first half of this year to Rm134mil compared to Rm19.6mil during the same period of the previous year.

“On the flip side, the divestment could be seen in the light of India being in a tough operating environment. There are also other outstanding issues at Fortis including an auditor’s qualified audit report in FY18, risk of more provisions, and lapses in internal controls, leading to regulatory probing, which could well mean execution risk,” Kenanga said.

Kenanga said the aggregate losses at Global and Continental account for 2% of its FY20 net profit forecast.