Investment Highlights

• We maintain BUY on IHH Healthcare (IHH) with an 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.

• Our forecasts are maintained following an analyst briefing yesterday. These are the salient highlights:
  • IHH reaffirmed the acquisition of 31.1% Fortis Healthcare’s (Fortis) equity stake for INR40bil (RM2.4bil) in Nov 2018 was via preferential allotment in a fair and transparent manner.
  • IHH neither purchased the equity stake by collecting in the open market nor procuring from lenders which were pledged by Fortis’ founders, Malvinder and Shivinder Singh (Singh brothers).
  • In the final order, India’s Supreme Court did not find any wrongdoing in the purchase of IHH’s 31.1%-equity stake in Fortis. We view this positively because this increases the likelihood that the mandatory takeover offer (MTO) could proceed for an additional equity stake of 26% for INR33.5bil (RM2bil). If this materialises, the additional stake could slightly raise IHH’s FY23F earnings by 3.8%.
  • Currently, IHH is seeking legal advice and in discussion with relevant authorities on the viability of the MTO to ensure full compliance with all requisite regulations in India.
  • Despite various rounds of deferments, IHH emphasises its commitment to grow its healthcare operations and serve patients in India. This alleviates concerns that the ongoing deferments could disincentivise IHH from further improving Fortis’ financial performance (Exhibit 1).
  • Recall that Daiichi Sankyo Co filed a legal suit to recover an arbitration award of US$500mil from the Singh brothers. Nevertheless, IHH guided that if the Singh brothers are unable to pay the compensation, Fortis is unlikely to be liable.
  • Nevertheless, India’s Supreme Court recommended that the High Court undertake a forensic audit on the transaction entered into between Fortis and RHT Health Trust (RHT), if it deems appropriate. IHH mentioned that the timeline for High Court to finalise its decision is unclear.
  • On a positive note, India’s Supreme Court quoted that in a prima facie manner, the acquisition of RHT’s 19 assets appeared to be improving the business structure of Fortis. We believe this provides a positive reference for the High Court’s decision making on whether a forensic audit is necessary.
• At this juncture, we view the stock trading at a compelling FY23F P/BV of 1.9x vs. its 5-year mean of 2.3x with a fair dividend yield of 2%.

Source: AmInvest Research - 28 Sept 2022