Analysts positive on IHH’s Fortis win, revise TP higher

Affin sees acquisition to be value accretive to existing IHH shareholders at a range of RM7.55-RM7.65


ANALYSTS are positive on IHH Healthcare Bhd’s acquisition of a controlling stake in India’s Fortis Healthcare Ltd and have increased their target price (TP) for the Malaysia-based hospital operator.

Affin Hwang Investment Bank Bhd said the buy is value accretive and enhances IHH’s long-term visibility in India’s growing healthcare sector.

IHH can raise its stake in Fortis by another 26% with its mandatory open offer. To fund the acquisition, IHH is expected to fork out RM4.3 billion in cash, with the bulk of the money to support the operations of cash-strapped Fortis, which is expected to be rebranded as Gleneagles in future.

“IHH would gain necessary board control of Fortis. The offers value Fortis and Fortis Malar (Hospitals Ltd) at a historical EV/Ebitda (enterprise value/earnings before interest, taxes, depreciation and amortisation) of 22.3 times and 53.6 times respectively,” Affin noted in a report yesterday.

Affin said due to depressed earnings and underlying value that is expected to normalise valuations of 15 times for the financial year ending 2019 (FY19) EV/Ebitda, IHH’s headline valuations are a premium to its peers.

According to the group, over the next 12 to 18 months, value is expected to be unlocked primarily through operational cost savings, as well as refinanced borrowing cost.

Affin expects the acquisition to be value accretive to existing IHH shareholders at a range of RM7.55-RM7.65 from existing IHH valuation of RM7.10. It reaffirmed a ‘Buy’ call on IHH with a 12-month sum-of-parts (SOP) derived TP of RM7.10.

MIDF Research said based on 5,637 operating beds at Fortis, the cost of acquisition per bed is between RM408,000 and RM763,000.

The research firm anticipates IHH’s revenue and Ebitda to increase by 23.6% and 16.5% respectively post-acquisition, while net gearing to increase 1.4 to 2.1 times from the current 0.3 times.

To account for the contribution from Fortis, MIDF lifted its earning projection on IHH by 7.7% for FY19.

“The acquisition opens the door to new markets such as Sri Lanka, which previously it has no exposure to.”

The Fortis acquisition will expand IHH’s exposure from 6% to 24% to the northern Indian region while, at the same time, bringing the total number of hospitals under its management to 83.

MIDF maintained its ‘Buy’ call with a revised TP of RM7.

RHB Research Institute Sdn Bhd is also keeping its ‘Buy’ call on IHH, but with an unchanged discounted cashflow (DCF)/SOP-based TP of RM7 until the acquisition exercise is completed by the fourth quarter (4Q) of this year.

RHB raises Fortis’ FY19 to FY20 revenue by 20% to 23%, while Ebitda by 11% to 12%.

However, Public Investment Bank Bhd forecasts the Fortis deal will not be earnings accretive in the near term and will potentially dilute IHH’s FY19 earnings by 1% to 4%, while FY20 impact will be marginal by 0.5% to 1%.

It said based on IHH’s ability to turn around hospitals, the long-term prospects seemed positive, but for Fortis, it is expected to be a tougher challenge and the recovery period will likely prolong.

This will result in a potential earnings dilution of up to 5%-10% and 3%-6% in FY19 and FY20 respectively, the research house noted in a report.