News/ Comments

• IHH Healthcare’s indirect wholly-owned subsidiary Integrated (Mauritius) Healthcare Holdings Limited (IMHHL) has on the 3 rd of March 2017 disposed 6.07% of the subscribed and paid up share capital of Apollo Hospitals Enterprise Limited (Apollo) via a book building process for a total cash consideration of INR10.7bn (RM710.9m).

• The disposal will see IHH book a one off gain of RM312.1m. The primary proceeds of the divestment will be employed for working capital of the group. We don’t expect the divestment to have any material impact to the group in the near term.

• Based on the average disposal price of INR 1280/ share our pro forma calculation implies that IHH’s total stake of 10.85% is worth circa RM1.27bn at exchange rates of (INR100:RM6.6654). IHH’s initial cost of investment for the 10.85% stake is RM713.3m, if we assume that the entire stake is divested at this pricing, the gain on disposal is circa RM558.2m. To note the disposal price is 13.4% below our SOP valuation of the stake in Apollo which is based on the consensus TP.

• We foresee that there is a potential for the group to divest the remaining stake of 4.78% in the near future as the group consolidates and rationalizes its investments in their 4 th home market.

• Moving forwards, we expect their 50:50 JV for Gleneagles Hyderabad and Gleneagles Kolkata with Apollo Hospitals Enterprise Limited to remain unaffected.

• Whilst the disposal comes as a surprise, we are neutral with a positive bias. We believe this disposal addresses the conflict of interest in the groups recent standalone forays into the Indian healthcare sector and serves as a primer for the group’s future presence in India.

• To recap IHH has made two major acquisitions in India in the past 18-24 months. A 73.4% stake in Global Hospitals with circa 1,100 operational beds and a 51.0 % stake in Continental Hospitals Limited with circa 750 operational beds which will continue to drive the group’s growth in the sub continent.

Catalysts

• Strategic geographic footprint in key gateway markets ready to take on the ageing and over stretched capacity of hospitals and tertiary healthcare services in Western Europe and East Asia. Growing population and rise in affluence in domestic markets will support demand for high quality healthcare.

Risks

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

Forecasts

• Unchanged.

Rating

HOLD ↔

• Whilst we like IHH for its exposure to key gateway markets, good management and strong reputation, earnings delivery in the near term will be hampered by higher pre-operational costs as the new hospitals are likely to take time to mature.

Valuation

• Our SOP-derived TP is revised to RM6.20 from RM6.21 as we revise our valuation parameters and pare down IHH’s stake in Apollo see Figure #1.

Source: Hong Leong Investment Bank Research - 6 Mar 2017