- We maintain HOLD on IHH Healthcare Bhd with an unchanged SOP-based fair value of RM5.55/share.

- Last Friday, IHH announced that its indirect whollysubsidiary Gleneagles Development Ptd Ltd (GDPL) is acquiring a 73.4% stake (on a fully-diluted basis) in Indiabased Global Hospitals for INR12.8bil (or RM819mil).

- The proposed acquisition will be paid in cash but is subject to certain conditions precedent (CP) set out in the definitive agreements. The deal is expected to be completed within three months.

- Global Hospitals (or Ravindranath GE Medical Associates Ptd Ltd) is a chain of hospitals offering tertiary and quaternary care in key metro-cities in India. It currently operates five hospitals (and three feeder centres) with ~1,100 operating beds.

- The chain is known for its focus on gastroenterology, hepatobiliary diseases, neurosciences and complex multiorgan transplants.

- While IHH did not disclose how the valuation of the acquisition was arrived at, management said it is reasonable vis-à-vis other deals done. Notwithstanding, we take comfort from the management’s perspective that the acquisition will help fortify its presence in the India market.

- Particularly, occupancy rates for Global Hospitals are healthy at 60%-70%, while EBITDA margin achieved for FY15 (ended March) were at the low-teens.

- Management appears confident of achieving breakeven faster than the usual 3-5 years of operations of new hospitals, due to better economies of scale, realised synergies and improved capacity.

- Out of the total payment, INR2.65bil (RM169mil) will be equity infused into Global Hospitals. The proceeds will be used to retire some of Global Hospital’s existing debt of INR3.9bil (RM251mil) as at end-March 2015 (which incur high borrowing costs) and for capex.

- Capex, particularly, will drive growth with plans to add another 800 beds within five years. The chain will also be rebranded under the Gleneagles banner.

- Our back-of-the-envelope calculations suggest that the acquisition has minimal impact on IHH Healthcare’s bottom line, at least in the short-to-mid term. Assuming 20% revenue growth and 12% EBITDA margin for FY16F, IHH will only see an EBITDA contribution of RM44mil from Global Hospitals.

- Overall, we are positive on the acquisition, but we maintain our numbers for now. Maintain HOLD.

Source: AmeSecurities Research - 1 Sep 2015