IHH’s will acquire a further 30% stake in Acibadem by virtue of the activation of the put options by Acibadem’s other shareholders. The enlarged share base is dilutive to existing shareholders (share based enlarged by c.6.4%), partially offset by greater share of contributions from Acibadem. By virtue of the increased stake in Acibadem, the group’s exposure to the forex volatility in Turkey is heightened. Maintain HOLD but our SOP based TP is reduced to RM5.32 (from RM6.16) as we adjust our SOP metrics to better reflect the heightened exposure to Turkey.

NEWSBREAK

News. Pursuant to the shareholders agreement, as per IHH’s prospectus, which granted the Aydinlar’s (Acibadem’s founder) and Bagan Lalang (Khazanah) the option to convert shares in Acibadem (c.229.2m shares representing 15% equity in Acibadem each) into new IHH shares (262.2m shares each). The Aydinlar’s have on the 8th of October notified their intentions to exercise their conversion rights; this would also automatically trigger Bagan Lalang’s exercise of its conversion rights which is identical to the terms of the former. In all, IHH will acquire a further 30% stake in Acibadem (15% each) via the issuance of up to c.524.5m new IHH shares to the option holders, raising its stake in Acibadem to 90%.

Rationale. The rationale cited for the acquisition namely pertains to the deleveraging at Acibadem. This acquisition will allow IHH to capitalise the existing subordinated loans of US$250 million equivalent which are currently supported by Acibadem Holding’s shareholders (the existing put options prevented the injection of equity capital into Acibadem) and to potentially hasten the divestment of Acibadem Holding’s non-core assets to reduce its foreign currency debt which stands at c.USD680m equivalent presently.

Approvals. The Aydinlar and Bagan Lalang acquisition are conditional upon the approval from BNM being obtained by IHH.

HLIB’s VIEW

Neutral view. We are neutral on this announcement as the enlarged share base is (i) dilutive to existing shareholders (share based enlarged by c.6.4%), partially offset by greater share of contributions from Acibadem, and (ii) by virtue of the increased stake in Acibadem, the groups exposure to the forex volatility in Turkey is heightened. Nonetheless, we appreciate that this acquisition is necessary and will hasten the group’s resolve to deleverage Acibadem’s balance sheet (gearing at 1H18: 9.72x) and minimize her exposure to forex volatility.

Forecast. We adjust our earnings to reflect the new share base and greater stake in Acibadem. Our FY19-20 core earnings will be enhanced by 5.8%-5.6% by virtue of the greater contributions from Acibadem, but EPS will be marginally diluted by -0.6% and -0.8%.

Maintain HOLD, TP: RM5.32. Our SOP based TP decreases to RM5.32 (from RM6.16). We calibrate our SOP metrics to reflect (i) the increased stake in Acibadem and (ii) lower our ascribed EV/EBITDA multiple to 18x (from 21x), to better reflect the heightened associated risks with a greater exposure to Turkey moving forward.

Source: Hong Leong Investment Bank Research - 9 Oct 2018