We joined a sell-side only conference call hosted by IHH’s CEO and CFO to touch base on concerns regarding the qualified opinion pertaining to its FY18 audited accounts. Management reiterated that concerns raised in the qualified opinion were known prior to the acquisition. Fortis will undergo the procedural impairment test annually as per the groups other assets. Given the many external variables affecting Fortis, we are of the opinion that out of all of IHH’s core assets, Fortis has the highest risk of impairment moving forward. Post clarification from management we are uplifting our under review call. The stock remains a HOLD. Post release of the audited accounts, our TP reduces to RM6.02 (from RM6.03) on model up keeping.

We joined a sell-side only conference call hosted by IHH’s CEO Dr. Tan See Leng and CFO Mr. Low Soon Teck to touch base on concerns regarding the qualified opinion and audit matters pertaining to its FY18 audited accounts, the following are some of the key takeaways:

Recap. Recall that IHH’s external auditors (KPMG) issued a qualified opinion and disclosed a key audit matter in its independent auditors’ report in respect of the Audited Financial Statements of IHH for FYE 31 Dec 2018. The qualified opinion pertains to Fortis and the key audit matter relates to Acibadem.

Initial concerns. Our initial report on this subject raised concerns centred upon the potential financial impact to the goodwill on the Fortis acquisition and less on Acibadem given that management had clarified that the impairment won’t affect IHH’s consolidated accounts.

The call. Management moved to reiterate that all the concerns raised in the qualified opinion with regard to Fortis are nothing new (intercorporate deposits of c.RM261m and lapses in governance and control by the previous board) and were known prior to the acquisition. The announcement was a technical matter given that the group had acquired Fortis in FY18. Note that the IHH Board has initiated an independent forensic audit on the operation of Fortis Group to be completed in FY19.

Our view. Horizon to completion of the Fortis acquisition remains tied to the outcome of external variables, thus the purchase price allocation is still ongoing. IHH has booked RM1.5bn in goodwill on acquisition for the Fortis acquisition in FY18 and this number will chart higher upon completion. Fortis will undergo the procedural impairment test annually as per the IHH’s other assets. Given the many external variables affecting Fortis, we are of the opinion that out of all of IHH’s core assets, Fortis has the highest risk of impairment moving forward.

Forecast. Post release of the audited accounts, our FY19-20 forecast adjusts by -2% due to model housekeeping. We also take this opportunity to introduce our FY21 numbers.

Maintain HOLD, TP: RM6.02. Post clarification from management we are uplifting our Under Review call. The stock remains a HOLD. Post release of the audited accounts, our TP reduces to RM6.02 (from RM6.03) on model housekeeping. Whilst we like IHH for its exposure to key gateway markets and astute management; earnings delivery will be highly dependent on the velocity of them improving their increased exposures to India and Turkey. We have always maintained that the acquisition of Fortis is positive in the long run; however we qualify that the speed to completion and gestation period for this acquisition remains opaque amidst the backdrop multiple court cases and other external variables at play.

Source: Hong Leong Investment Bank Research - 9 Apr 2019