Investment Highlights

• We maintain our HOLD recommendation on IHH Healthcare with an unchanged FV of RM5.50 based on DCF (WACC 8.3%; terminal growth rate 3.5%).

• IHH announced on Bursa Malaysia that a notice of contempt has been issued to Fortis by the Supreme Court of India. This was in relation to its decision to buy back hospital assets from Religare Health Trust (RHT).

• We maintain our forecasts for IHH as we believe there will be minimal impact operationally. IHH remains a controlling stakeholder in Fortis with management control. Fortis’ results will continue to be consolidated in IHH’s financial statements.

• The key takeaways from yesterday’s teleconference briefing are as follows:

1. The 31.1% expanded voting share capital of Fortis held by IHH was acquired through preferential allotment, which was completed on 13 November 2018.

• IHH said that the subscription was done in a fair and transparent manner after obtaining the requisite corporate and regulatory approvals and in accordance with all applicable laws.
• It was undertaken and completed after Malvinder and Shivinder Singh were no longer in control of Fortis. IHH has not dealt with nor colluded with the Singh brothers or any entities related to or controlled by them in relation to the subscription.

2. In light of the judgment, the Fortis open offer and the Malar open offer will not proceed for the time being but IHH remains committed to proceed once the stay is lifted by the Supreme Court of India. There is no expiry to the mandatory open offer.

3. We believe this is slightly negative as the mandatory open offer to acquire up to 26% of the expanded capital of Fortis and up to 26% of Fortis Malar would be suspended. Fortis is also at risk of being held guilty of contempt of court. We are unsure if this would lead to penalties, reversal of the acquisition or settlement of the Daiichi Sankyo case as this case is unique and it is dependent on the court’s decision.

4. The hearing on 3 February 2020 will be the next opportunity for Fortis to present the facts regarding the contempt proceedings. There is a possibility that judgment will be passed on that day.

6. Operationally, it is business as usual for Fortis. However due to the status quo order, Fortis will not be able to get financing from state banks. According to IHH, there is sufficient cash flow to continue its day-to-day operations.

7. According to The Edge Financial Daily, which quoted India’s Economic Times, IHH is facilitating the planned sale of up to 44% stake (it currently own 56%) in SRL, the diagnostic arm of Fortis. IHH has clarified that at the moment, it has no intention to sell SRL.

Source: AmInvest Research - 19 Nov 2019