Based on the written judgment by the SCI, the Suo Moto Contempt Petition and the connected proceedings is disposed of, and the court has concluded no wrongdoings by IHH. The SCI also supports the belief that IHH’s investment in Fortis was done in a fair and transparent manner. However, the written judgement did state that the acquisition of RHT by Fortis may institute a forensic review, only if the High Court deems appropriate. IHH remains committed to serve the India market and has initiated discussions and getting further advices from authorities, regulators and legal counsels pertaining the outstanding MTO. On a separate note, in relation to Turkey being classified as a hyperinflationary economy, we have recalibrated our balance sheet value as the adoption of MFRS129 will result in a permanent uplift in asset value and higher depreciation and amortisation charge going forward. Therefore, our forecasts for FY22-24f is lowered by 6-12%. Maintain BUY on IHH with unchanged SOP derived TP of RM7.75.

To recap. IHH acquired a 31.1% stake in Fortis in Nov 2018, triggering a mandatory takeover offer (MTO) to acquire an additional 26.1% stake. However, IHH was caught in the crossfires between Daiichi Sankyo Co and the Singh brothers when the former filed a lawsuit to recover an arbitration award of over USD500m from the latter. Following that, the Supreme Court of India (SCI) has issued a status quo order in Dec 2018, preventing all parties involved from taking any further actions, resulting in the Fortis open offer being put on hold.

Verdict. The SCI has disposed of the matter as no wrongdoings by IHH was discovered in the proc ess and the SCI supports the belief that IHH’s investment in Fortis was done in a fair and transparent manner. Note that IHH acquired Fortis’ shares by way of new shares subscription, instead of purchasing the shares from the open market or by purchasing the Singh brothers’ pledged shares in the bank. Based on IHH’s previous investigations, the Singh brothers were also no longer shareholders in Fortis when the transaction took place. That said, the written judgement did state that the acquisition of RHT by Fortis may institute forensic audit review, but only if the High Court deems appropriate.

Next steps. IHH remains committed to serve the India market, and has initiated discussions and seeking advices from authorities, regulators and legal counsels pertaining the outstanding MTO. On IHH’s end, relevant documents are ready to be filed once there is clarity on the next steps.

Recalibrating balance sheet value. On a separate note, as Turkey is deemed as a hyperinflationary environment and thus, the adoption of MFRS129 will result in a permanent uplift in asset value, given that the balance sheet is re-indexed to ensure comparability across financial statements. The higher asset value will also lead to a higher depreciation and amortisation charge in future reporting periods. In view of that, we have recalibrated our balance sheet (mainly adjusting our assumption on PPE’s carrying value) to reflect this change.

Forecast. Following our recalibration in the balance sheet items, our forecasts for FY22-24f is lowered by 6-12%, given the higher expected depreciation and amortisation charges going forward.

Maintain BUY, TP: RM7.75. Our SOP-derived TP of RM7.75 remains unchanged as IHH’s hospital operations are valued based on EV/EBITDA, which is not affected by the change in depreciation and amortisation charges. We continue to like IHH for its refreshed strategy to support sustainable growth and the management’s commitment to continuously seeking out new growth opportunities. Maintain BUY.

Source: Hong Leong Investment Bank Research - 28 Sept 2022