Investment Highlights

• We maintain our HOLD recommendation on IHH Healthcare with a lower FV of RM5.30/share post-dilution based on DCF (WACC: 8.27%, terminal growth rate: 3.5%).

• IHH Healthcare has acquired circa 30% equity interest in Acibadem Sagklik Yatirimlari Holding AS (Acibadem Holding), increasing its shareholding in the subsidiary from 60% to 90%.

• This followed the exercise of the option by the founder and CEO of Acibadem Holding, Mehmet Ali Aydinlar (MAA), and his wife, Hatice Seher Aydinlar (HSA) which saw a conversion of their 15% holding in Acibadem Holding into around 262.2mil new shares in IHH.

• Meanwhile, Khazanah Nasional (Khazanah) via its whollyowned subsidiary Bagan Lalang Ventures Sdn Bhd (Bagan Lalang) exercised its option to convert its 15% holding in Acibadem Holding into around 262.2mil new shares in IHH.

• Following the exercise of both options, IHH’s share base will be enlarged by 6.4% from 8,244mil shares to 8,769mil shares. The acquisition is expected to be completed by 4Q18.

• We are slightly negative on the latest development. We expect IHH’s FY19F EPS to be diluted by circa 4.4% from 13.4 sen to 12.9 sen due to the increase in the group’s share base. The dilution from the rise in IHH’s share base offsets the estimated net earnings enlargement of 2% in FY19F from the bigger share of its Acibadem Holdings operations. Acibadem contributes circa 26% of IHH’s EBITDA.

• However, the completion of this acquisition will provide IHH with greater control in paring down the foreign currency denominated loans in Acibadem Holding’s balance sheet. IHH plans to inject US$250mil, which is currently supported by Acibadem Holding’s shareholders, to reduce its foreign currency debt. IHH might convert some of the foreign currency debt into equity.

• The weakening Turkish lira has been negatively impacting the company’s earnings growth due to the higher financing cost.

• We remain cautious on IHH as we believe earnings will be dragged by the weaker lira as well as higher operating cost despite: (1) the strong prospects of the private healthcare sector backed by rising affluence and the aging population; and (2) its position in the premium segment of the private healthcare sector, translating to high EBITDA margins of around 20%.

Source: AmInvest Research - 9 Oct 2018