News/  Comments

• On Friday, 28th of August, the group announced its plans to acquire Global Hospitals through its indirect wholly-owned subsidiary; Gleneagles Development Pte Ltd. IHH will acquire and subscribe 73.4% of the equity interest on a fully diluted basis. Over time, Global Hospitals would be rebranded as Gleaneagles Hospitals.

• The acquisition amounting to INR12.84bn or equal to RM819m would be paid via cash (subject to adjustments on changes in working capital and debt which will be determined upon completion of acquisition). As at 30th June 2015, IHH Healthcare has cash of RM2.5bn.

• A renowned healthcare service provider in India, Global Hospitals Group is a chain of tertiary and quaternary care hospitals, with facilities across Hyderabad, Chennai, Bangalore and Mumbai. It has circa 1,100 operational beds and is expected to increase to 1,900 beds over 5 years with minimal capex needed.

• Currently it has 60%-70% occupancy for its mature hospital. Global Hospitals’ bottomline is affec ted by high borrowing costs (cost of borrowings in India is exceptionally high, with Global Hospitals paying interest rate up to 15%). As stated by the management, they expect approximately 3-5 years for Global Hospitals to breakeven. However, it is EBITDA positive.

• Also, Global Hospitals is a pioneer in Multi-Organ Transplants which includes kidneys, liver, heart as well as lungs.

• Note that earlier this year (23rd March 2015), the group also acquired Continental Hospitals Limited which is situated in Hyderabad. Neutral on the acquisition. The Global Hospitals acquisition would enable the group to set a stronger foothold in the Indian healthcare market, but it would have a short -term drag on earnings.

Catalysts

• Global population growth, ageing demographics, more affluent community, proliferation of medical tourism and overwhelming healthcare demand.

Risks

• Regulatory / competitive / FOREX risks, increase in staff cost and unable to unlock synergies of the enlarged entity.

Forecasts

• Unchanged.

Rating

• SELL , TP: RM4.51
• Positives- strong brand name, booming of medical tourism, high demand for quality healthcare services, continuous expansions and complemented by education arm.
• Negatives-high staff cost and retention of reputational medical practitioners.

Valuation

• Maintain SELL with unchanged SOP-derived TP of RM4.51 (see Figure #1) as share price has run ahead of fundamentals.

Source: Hong Leong Investment Bank Research - 1 Sep 2015