Investment Highlights

• We upgrade IHH Healthcare (IHH) to BUY from HOLD previously as the share price has retraced 6% over the past 3 days mainly due to an over-reaction to the forensic audit on Fortis-RHT deal. This led to an upside of 19% currently to our unchanged DCF-derived fair value of RM6.89/share, based on a WACC of 7%, terminal growth rate of 3.5% and 3% premium for an ESG rating of 4 stars. This implies an FY23F P/BV of 2.3x – at parity to its 5-year mean.

• IHH announced that India’s Supreme Court has ordered a forensic audit on the transactions between Fortis Healthcare (Fortis) and RHT Health Trust (RHT).

• According to Bloomberg, the Supreme Court also refused to lift the suspension imposed against IHH to proceed with an open offer to acquire another 26% equity stake for up to INR33.5bil (RM2bil) in Fortis.

• To recap, IHH became the controlling shareholder of Fortis upon the acquisition of its 31.1% equity stake for INR40bil (RM2.4bil) on 13 Nov 2018. This triggered a mandatory takeover offer (MTO) to an acquire additional 26% of Fortis’ total capital from existing shareholders. This open offer was scheduled to commence on 18 Dec 2018.

• However, Daiichi Sankyo Co (Daiichi) filed a legal suit to recover an arbitration award of US$500mil from Fortis’ exfounders Malvinder and Shivinder Singh. Hence, India’s Supreme Court issued a status quo order on 14 December 2018, which prevented any of the parties involved in the dispute from taking any further action until the matter can be resolved.

• On 19 Nov 2019, India’s Supreme Court issued a suo-moto notice of contempt against Fortis for violation of the status quo order after Fortis’ acquisition of RHT’s 19 hospital assets in India for a total enterprise value of INR46.7bil (or RM2.7bil) on 15 Jan 2019.

• All in, we view this forensic audit as slightly negative. If there are negative findings post-forensic audit, Fortis could be at risk of being penalised. Assuming a 10% penalty of the total consideration for the acquisition of RHT’s Indian assets on IHH’s 31% equity stake in Fortis, this translates to INR4.67bil (or RM262mil) - 3.5% in FY23F core earnings.

• Moreover, we remain negative on the continued suspension of the open offer since Dec 2018. These ongoing deferments could disincentivise IHH from further improving Fortis’ financial performance (Exhibit 1) as compared with a scenario wherein IHH holds a higher 57% equity stake.

• Besides, IHH may not be able to secure the incremental earnings from the 26% stake in Fortis if the open offer is aborted. If it is successful, we estimate that the additional Fortis stake could have slightly raised IHH’s FY23F earnings by 3.8%.

• Fortis’ share price plunged by 15.9% since last Thursday and stabilised at INR261.7/share. Based on our calculation, 31.1% of Fortis market cap accounted for 7.7% of IHH market cap on Wednesday (prior to the plunge). While back-of-envelope calculation implies IHH’s share price should only drop by 1.2%, it has currently corrected by 5%, implying an over-reaction.

• Pending further clarity from these developments, we maintain earnings forecasts for now given that IHH is still in the process of seeking legal counsel.

• At this juncture, the stock trades at a compelling FY23F P/BV of 1.9x vs. its 5-year mean of 2.3x while dividend yields are fair at 2%.

Source: AmInvest Research - 26 Sept 2022