Investment Highlights

• We maintain our HOLD recommendation on IHH Healthcare with an unchanged FV of RM5.30/share based on DCF (terminal growth rate: 3.5%, WACC: 8.3%). Our fair value of RM5.30/share implies an FY19F PE of 40.9x.

• IHH’s auditors issued a qualified opinion on its FY18 financial statements in relation to Fortis Healthcare. Recall that IHH acquired a 31.1% stake in Fortis in November 2018 and the group will be making an open offer to buy an additional 26% stake in Fortis upon the lifting of status quo order by India’s Supreme Court.

• The rationale behind the opinion is that there are ongoing investigations by various parties on Fortis, as such the auditors were unable to ascertain the extent of funds’ diversions, if any, in excess of the amount that had been provisioned for prior to the acquisition (circa RM261.2mil).

• We are negative on this as there is a risk of impairments which would impact the groups’ financial statements. The provisional goodwill accounted for Fortis in FY18 is RM1.5bil.

• The Fortis’ board has taken steps to review and tighten its internal governance control and also in initiating civil actions against former controlling shareholders of Fortis and various other entities demanding recovery of the outstanding amounts.

• IHH’s internal investigations that have been ongoing since November 2018 have not uncovered any additional sources of diversions. The group has also initiated an independent forensic audit on Fortis’ operations, which is expected to be completed by December 2019 to ensure sources of diversions or funds are identified.

• Moreover, on the company level, there was a RM2.3bil charge on the company’s profit or loss based on the impairment assessment on its Turkey investment as it faces the risk of a depreciation of the Turkish lira. However, this amount has no bearing on the group level as the amount will be reversed during consolidation of accounts.

• On another note, IHH’s plans to pare down its debt by US$250mil to US$420mil from US$670mil are still ongoing and is currently awaiting Bank Negara’s approval.

Source: AmInvest Research - 9 Apr 2019