Investment Highlights

• We maintain BUY call on IHH Healthcare (IHH) with an unchanged DCF-derived fair value (FV) of RM6.89/share, based on WACC of 7%, terminal growth rate of 3.5% and a 3% premium for our ESG rating of 4 stars. This implies an FY23F P/BV of 2.3x – at parity to its 5-year mean.

• IHH announced that the group is now in discussion with the Securities and Exchange Board of India (SEBI) to obtain approval for proceeding with the mandatory tender offer (MTO) to acquire an additional 26% of Fortis’ shares from its existing shareholders. IHH affirmed that the group is ready to proceed with the MTO as soon as the group receives SEBI’s permission.

• To recap, IHH became the controlling shareholder of Fortis with the acquisition of a 31.1% equity stake for INR40bil (RM2.4bil) on 13 Nov 2018. This triggered an MTO to acquire an additional 26% of Fortis’ shares from existing shareholders. This was then 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 Health Trust’s 19 hospital assets in India for a total enterprise value of INR46.7bil (or RM2.7bil) on 15 Jan 2019.

• On 27 Sep 2022, in an analyst briefing, IHH clarified that there were no more legal cases pending at the Supreme Court level. In the Court’s final written judgment dated 22 Sep 2022, no wrongdoing was found in IHH’s Fortis investment. However, the High Court was given discretion to decide that a forensic audit is necessary for the FortisRHT deal.

• All in, we view this announcement positively as IHH should be able to secure the incremental earnings from the 26% stake in Fortis. Should the MTO be successful, we estimate that the additional Fortis stake could slightly raise IHH’s FY23F earnings by 3.8%.

• Furthermore, we believe the success of the MTO, which will increase IHH’s equity stake in Fortis from the current 31.1% to 57.1%, could further incentivise IHH to improve Fortis’ financial performance (Exhibit 1).

• Pending further clarity from this development, we maintain earnings forecasts for now given that IHH is still in the process of securing SEBI’s approval.

• At this juncture, we view the stock trading at a compelling FY23F PB of 2.0x vs. its 5-year mean of 2.3x while dividend yields are fair at 2.1%.

Source: AmInvest Research - 14 Nov 2022