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IHH Healthcare 8 May 2018 Company Update HLIB Research PP 9484/12/2012 (031413) IHH Healthcare Sheikh Abdullah [email protected] Like a Bollywood feature film (603) 2083 1711 nd IHH has made several revised offers for a stake in Fortis (India’s 2 largest hospital chain). Its newly revised offer encompasses a binding (INR650 Crore) HOLD (Maintain) and non-binding (INR3350 Crore) portion at a price not exceeding INR175/share. This effectively values Fortis at 24x EV/EBITDA compared to IHH’s 19.4x Target Price: RM6.07 (FY18).We expect this offer will trigger a GO and net gearing to increase to Previously: RM6.07 0.14x-0.4x. Maintain Hold and a TP of RM6.07. Current Price: RM5.96 Capital upside 1.8% The proposal. Over the course of the past few weeks, IHH has made several revised Dividend yield 0.6% offers to the board of Fortis Healthcare expressing its interest in “participating in Fortis Expected total return 2.4% and its affiliates”. IHH’s initial non-binding offer was for INR4000 Crore (c.RM2.4bn) in totality for an equity portion of Fortis via a preferential issue and allotment of equity Sector coverage: Healthcare shares at INR160/share (c.RM9.42). This equity injection is for the immediate liquidity Company description: IHH runs a chain of requirements for working capital, short term funding requirement, the RHT (Religare hospitals in Malaysia, Singapore, Turkey, India and Healthcare Trust) buyout and infrastructure work. The offer price has since been China. revised however we understand that IHH’s absolute total value of the investment (INR4000 Crore) is fixed. Share price The target. Fortis Healthcare Ltd is the 2nd largest hospital chain in India which (RM) IHH (LHS) KLCI (RHS) Pts 7.75 1900 encompasses both hospital and the diagnostics business. It operates a network of 34 1875 7.50 1850 hospitals with over 4,600 operating beds, employing over 2,600 doctors and 6,500 7.25 1825 1800 nurses. Its 3 year CAGR on revenue stood at 3.9% and EBITDA at 23% (FY17 7.00 1775 6.75 1750 EBITDA margin: 7.9%). 1725 6.50 1700 6.25 1675 1650 The crown jewel. SRL Limited, a 56.6% subsidiary of Fortis is primarily involved in 6.00 1625 providing diagnostics services and is amongst the leading diagnostics chains in India 5.75 1600 1575 with a significant market share. It has a network of 356 laboratories and 5,245 5.50 1550 Apr-17 Jun-17 Jul-17 Sep-17 Oct-17 Dec-17 Jan-18 Mar-18 collection points as of FY03/17. SRL dominates the public-private partnership space Historical return (% ) 1M 3M 12M in Indian diagnostics with partnerships in 3 states with a population catchment of Absolute 0.7 1.2 -2.1 c.240m people (Uttar Pradesh, Himachal Pradesh & Jharkand). Its 3 year CAGR on Relative 0.6 0.6 -7.1 revenue stood at 9% and EBITDA at 18% (FY17 EBITDA Margin: c.19.8%). Stock information The initial offer. IHH’s initial offer (16th April) was rebuffed due to its non-binging Bloomberg ticker IHH MK nature. It is understood that due to the influx of offers, the board of Fortis has Bursa code 5225 th Issued shares (m) 8,240 appointed an expert advisory committee to review all “binding offers” on 26 April and th Market capitalisation (RM m) 50,014 will convene on the 10 May to consider offers. 3-mth average volume (‘000) 4,551 SC Shariah compliant Yes The revised “partially binding” offer. Under the terms of the newly revised offer, this will be divided into a binding and non-binding potion. For the former, IHH is willing Major shareholders to inject INR650m Crore (c.RM380m) of primary equity without due diligence and Khazanah Nasional Bhd 40.6% immediately acquire 2 board seats, subject to (i) IHH being given confirmation to carry Mitsui & Co Ltd 18.0% out immediate legal and financial due diligence, (ii) receipt of applicable approvals EPF 8.8% from Fortis shareholders and regulators and (iii) the end use of the immediate equity infusion to be discussed with IHH’s nominees on the board of Fortis. For the non- Earnings summary binding portion of the revised proposal, IHH will infuse INR3350 Crore (RM1.97bn) FYE (Dec) FY17 FY18e FY19f though a subsequent preferential issue and allotment, subject to satisfactory PATMI – 595.6 996 1,433 EPS – (sen) 7.2 12.1 17.4 completion of due diligence at a price not exceeding INR175/share (c.MYR10.30 P/E (x) 82.9 49.3 34.3 19.8based on16.7 the enhanced offer). Valuation. The enhanced offer implies that IHH values Fortis at 24x EV/EBITDA (based on Bloomberg consensus) which is a premium to IHH’s FY18 EV/EBITDA of 19.4x. The offer will amount to a 31% stake of equity in Fortis on an enlarged share basis; this represents a controlling stake in the hospital chain. Our view. According to several media sources (local and India), there are up to 4 binding offers on the table for the Fortis board to consider (TPG & Manipal, KKR, Hero 1 HLIB Research l www.hlebroking.com IHH Healthcare l Company Update Enterprise and IHH). Considering such public interest in Fortis, we do expect a bidding war to precipitate. At the implied valuation of 24x EV/EBITDA we remain neutral on this pending greater insight from the due diligence, albeit with a negative bias as this represents a premium of c.24% to IHH’s 19.4x FY18 EV/EBITDA. GO to be triggered. We understand that IHH’s offer for the 31% stake will trigger a mandatory general offer. Our pro-forma calculation implies that at INR175 per share, the remaining 519m of Fortis shares outstanding would be worth INR9134 Crore (RM5.4bn) which would bring the value of this whole exercise to RM7.8bn. Impact to net gearing. With RM6.1bn cash and net gearing of 0.03x as at FY17, IHH has the balance sheet strength to undertake the acquisition but will have to gear up to complete the entire acquisition. We expect net gearing to increase to 0.14x assuming IHH’s investment into Fortis is limited to their offer for a 31% stake whilst a GO could potentially increase net gearing to 0.4x. Synergy. In terms of synergistic benefits to the group, we believe that the acquisition of Fortis would complement IHH’s existing presence in India which is currently concentrated in the southern regions (recall they acquired Global Hospital - 73.2% stake and Continental hospitals - 51% stake in 2015). Currently India comprises of only 1% EBITDA contribution as at FY17. We believe this acquisition will propel IHH’s geographic and earnings footprint in the sub-continent in the midterm. Not in pole position. We are of the opinion that TPG and Manipal might have the edge as they have been in earlier discussions with Fortis. This puts them at a significant advantage as discussion have been on going at the board level coupled with the fact that Manipal is a local entity. Forecast. Unchanged pending further concrete announcements. Maintain HOLD, TP: RM6.07. We maintain our TP based on SOP which implies FY19-20 EV/EBITDA of 16.6x-14.8x Figure #1 Financial forecast summary FYE Dec (RM m) FY16 FY17 FY18f FY19f FY20f Revenue 10,021.9 11,142.6 12,014 13,036 14,185 EBITDA 2,283.2 2,279.5 2,715 3,189 3,472 EBIT 1,483.3 1,303.0 1,786 2,247 2,518 PBT 877.6 1,164.5 1,463 2,062 2,359 PAT 608.0 829.8 1,112 1,567 1,793 PATMI – Core 866.0 595.3 996 1,433 1,644 % change YoY – Core PATMI -34.4 58.4 67.3 43.8 13.9 HLIB/ Consensus (% ) – Core PATMI NA NA 1.8 15 0.2 Core EPS (sen) 7.4 7.2 12.1 17.4 20.0 P/E (x) 81.4 84.2 49.3 34.3 29.9 EV/EBITDA (x) 24.9 23.2 19.4 16.6 14.8 DPS (sen) 3.0 3.0 3.5 3.5 3.5 Yield (% ) 0.5 0.5 0.6 0.6 0.6 BVPS (RM/share) 2.7 2.9 3.0 3.2 3.4 P/B (x) 2.2 2.1 2.0 1.9 1.8 ROE (% ) 2.5 2.3 3.7 5.1 5.5 Net Gearing (% ) 20.7 3.0 10.7 4.9 Net Cash HLIB Research 2 HLIB Research l www.hlebroking.com IHH Healthcare l Company Update Figure #2 Peers comparison Stock Mkt Cap Currency Price Target Rating FYE P/E (x) P/B (x) ROE (%) Yield (USD m) (RM) (%) FY18 FY19 FY18 FY19 FY18 FY18 IHH Healthcare 12,277.1 MYR 5.96 6.07 HOLD Dec 49.3 34.3 2.0 1.9 3.7 0.6 Bhd KPJ Healthcare 983.4 MYR 0.92 1.18 BUY Dec 22.1 20.0 2.0 1.8 9.4 2.0 Bhd Raffles Medical 1,561.1 SGD 1.17 * * Dec 31.6 33.4 2.7 2.6 8.0 1.9 Group Ltd Bumrungrad 4,530.2 THB 196.5 * * Dec 33.5 32.1 7.6 6.8 23.5 1.5 Hospital PCL Bangkok Dusit Medical Services 11,516.5 THB 23.5 * * Dec 40.0 36.2 5.4 5.0 14.1 1.3 PCL Bangkok Chain 1,380.6 THB 17.5 * * Dec 41.1 35.6 7.6 6.7 19.3 1.4 Hospital PCL Apollo Hospital 2,231.4 INR 1,071.5 * * Mar 74.3 41.7 3.9 3.6 8.9 0.5 Ent Fortis Healthcare 1,180.5 INR 152.1 * * Mar 0.00 77.3 1.5 1.5 1.8 0.0 Ramsay 9,839.7 AUD 64.6 * * Jun 22.7 20.8 5.5 4.9 23.9 2.3 HealthCare Primary 1,499.3 AUD 3.8 * * Jun 21.1 19.2 1.1 1.1 5.5 2.9 HealthCare HCA Healthcare 33,580.4 USD 95.3 * * Dec 11.0 10.1 N/A N/A N/A 1.5 Inc Laboratory Corp of America 17,593.2 USD 172.5 * * Dec 14.9 14.0 2.6 2.6 19.7 - Holdings HLIB Research 3 HLIB Research l www.hlebroking.com Hong Leong Investment Bank Berhad (10209-W) Disclaimer The information contained in this report is based on data obtained from sources believed to be reliable.
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