Investment Highlights

• We reiterate HOLD on IHH Healthcare (IHH) with an unchanged DCF-derived fair value (FV) of RM6.28/share. This implies an FY24F P/BV of 1.8x, close to its 5-year average of 2.0x and incorporates a 3% premium for our unchanged ESG rating of 4 stars.

• Last Friday, IHH entered into sale and purchase agreements (SPAs) and other ancillary agreements with Dr Ravindranath Kancherla and his affiliates (Dr Ravi Group) for the purchase of an additional 24.5% equity stake held by Dr Ravi Group in Ravindranath Ge Medical Associates (RGE) for INR7,400mil (RM415mil) cash. This increases IHH’s stake in RGE from 74.6% to 98.2%.

• The acquisition, anticipated to complete by 4QFY23, is not subject to any regulatory approvals. Separately, we deem that the relatively minor ancillary agreements (RM4K-RM17mil) do not have any material impact on IHH.

• Dr Ravi is the founder of RGE, which owns the chain of Gleneagles Global Hospitals (GGH), a leading tertiary and quaternary healthcare chain specialising in multi-organ transplants in India. GGH operates 6 hospitals across Hyderabad, Chennai, Bengaluru and Mumbai in India with a capacity of 1,500 beds.

• GGH, currently operating at a 54% occupancy rate, has an annualised EBITDA of RM100mil-110mil with the latest EBITDA margin in the low-teens, which is lower than IHH's overall Indian operation’s 17% in FY22. We estimate that the increase of 24.5% equity stake could increase FY24F-25F EBITDA by RM25mil-28mil (1% in FY24F-25F). Given the minimal impact, we maintain FY23F-25F earnings.

• The acquisition price implies an attractive EV/EBITDA of 16x, lower than the top 5 hospital operators listed in India (Max Healthcare, Apollo Hospitals, Fortis Health, Narayana Hrudayalaya and Global Health), which are trading at 5-year average of 22x-26x.

• All in, we positively view this acquisition, which will strengthen IHH’s presence in India’s healthcare sector.

• IHH’s balance sheet remains strong with a FY23F net gearing of 0.24x, which will marginally increase to an estimated 0.26x after this deal.

• We deem that the stock is trading at a fair FY24F P/BV of 1.7x vs. its 5-year average of 2.0x amid slowing global economic growth prospects.

Source: AmInvest Research - 28 Aug 2023