IHH’s RM2.35b Fortis deal fairly valued: Analysts

July 16, 2018 | By | Reply More

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PETALING JAYA: The proposed RM2.35 billion acquisition of India’s Fortis Healthcare Ltd by IHH Healthcare Bhd appears fairly valued, as it is value accretive and enhances visibility over the latter’s longer term prospects in India, said analysts.

Last Friday, IHH announced that it won the bid and its indirect wholly owned subsidiary Northern TK Venture Pte Ltd (NTK) proposes to buy a 31.1% stake in Fortis by way of preferential allotment for RM2.35 billion, at RM9.98 per share.

The group plans to launch a mandatory open offer to acquire a 26% stake in Fortis for RM1.97 billion. It will also undertake a mandatory open offer to buy a 26% stake in Fortis Malar Hospitals Ltd for RM17 million.

Analysts noted that the acquisition would increase the hospital operator’s revenue contribution coming from India to 24% post-acquisition from the current 6%, making it the group’s fourth largest home market.

Nevertheless, based on the group’s short and long-term plans for Fortis, analysts expect the acquisition to not be earnings accretive in the near term.

MIDF Research said in a report that the firm believes the acquisition is fairly valued given that Fortis is the second largest hospital player with pan-India footprint and strong presence in all key hubs across India; has a network of 40 hospitals; presence in five different countries and; owns a leading nationwide diagnostic business with 368 laboratories and over 24 wellness centres.

“Furthermore, the acquisition is also earnings accretive given that no new IHH shares will be issued to finance the acquisition and we are expecting revenue and ebitda (earnings before interest, tax, depreciation and amortization) to increase by 23.6% and 16.5% respectively post-acquisition,” it added.

MIDF said the acquisition would also increase the number of IHH’s operating hospitals to 83 from the current 43, and opens the door to new markets such as Sri Lanka.

Meanwhile, PublicInvest Research said that depending on IHH’s final stake in Fortis, the acquisition would potentially dilute the group’s FY19F earnings by circa 1-4%, while FY20F impact will be marginal, at around 0.5%-1%.

“Nevertheless, we are positive over the long-term prospects, as we see improvement in profitability of the hospitals given IHH’s expertise and track record as a global healthcare player.

“If, however, turnaround in Fortis proves to be tougher than expected, recovery period will likely prolong, resulting in potential earnings dilution of up to 5-10% and 3-6% in FY19F and FY20F,” it added.

Pending completion of the deal expected to be by fourth quarter of calendar year 2018 (4QCY18), PublicInvest said it maintained its earnings estimates and “neutral” stance on IHH with unchanged target price of RM6.57 premised on FY19 blended EV/ebitda.

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