Indian Supreme Court held Fortis’ founders (i.e. the Singh brothers) guilty of contempt of court and said it could start similar proceedings against Fortis. We are relatively neutral on this news as the potential fine sum is miniscule but do note of possible reputational risk. Maintain forecast as we have not factored in any incremental consolidation sum from Fortis from the pending additional 26% stake. Maintain HOLD with lower TP of RM5.66 (from RM6.02). Other external factors (HK protests and weak Lira) are not playing in IHH’s favour.

NEWSBREAK

India’s Supreme Court has refused to lift the block on completion of the takeover of embattled hospital chain Fortis Healthcare Ltd by IHH. The court held Fortis’s founders guilty of contempt of court and said it could start similar proceedings against the company. This effectively halts IHH’s open offer to Fortis’ shareholders that would have brought its holdings in India’s second largest hospital company above 50%. (The Edge)

HLIB’s VIEW

Recap. To recap, IHH acquired a 31.1% stake in Fortis back in Nov 2018 for RM2.4bn. Under Securities and Exchange Board of India (SEBI), the preferential allotment of Fortis shares (when it acquired the 31.1% stake) triggered a mandatory takeover offer (MTO) of c.26% of the outstanding voting shares.

Neutral on the news. Overall, we are relatively neutral on the said news. If the Supreme Court decides that IHH cannot proceed with the MTO of Fortis (c.26%), IHH is still the single largest shareholder (31% stake) having 5 nominated members on Fortis board. However, at this point of time, no verdict has been made. We understand that IHH’s take over on Fortis has been put on hold since Dec 2018.

Potential fine (if any) is miniscule. With IHH having a 31% stake in Fortis, the contempt of court on the Fortis’ founders; (i.e. the Singh brothers) may spill over to IHH; it was mentioned that the court might start similar proceedings against Fortis. Still, we note that the potential fine sum is miniscule. In India, under Section 12 of Contempt of Court Act, 1971, a contempt of court can be punished with simple imprisonment for a term which may extend to 6 months, or with fine which may extend to 2k rupees, or both. The spill over risks, if any, will be more reputational in nature, we reckon.

Forecast. Forecast maintained. We have not priced in the additional consolidation sum resulting from the pending incremental 26% stake into our forecasts.

Maintain HOLD, TP: RM5.66. This news aside, other external factors are also presenting headwinds to IHH; i.e. the escalating HK protests and weak Turkish lira. Given such, we lower our EV/EBITDA target from 18x to 17x, which is -1.5SD below 5-year mean. Maintain HOLD with lower TP of RM5.66 (from RM6.02). Our TP implies FY19-20 EV/EBITDA of 18.3x-16.3x (from previously 19.3x-17.2x).

Source: Hong Leong Investment Bank Research - 18 Nov 2019