IHH announced the proposed Fortis acquisition through the issuance of new shares and an open offer. While IHH looks to turnaround Fortis’ operations, Fortis instantly scales and compliments IHH’s presence in India overnight. We are positive on the announcement as it is value accretive and enhances visibility over IHH’s longer term prospects in India. Maintain BUY and TP of RM7.10.

Finalising Controlling Stake in Fortis

IHH’s proposed acquisition of a controlling stake in Fortis Healthcare (Fortis) is via a combination of i) proposed subscription of 235m new Fortis shares (31% of total voting equity) through a preferential allotment and ii) mandatory open offer for Fortis and Fortis Malar, both of up to 26%. Cash consideration will range up to RM4.3bn. On the basis of a successful preferential allotment alone, IHH would gain necessary board control of Fortis. The offers value Fortis and Fortis Malar at a historical EV/EBITDA of 22.3x and 53.6x, respectively.

Underlying Value to Normalized Valuations at 15.0x FY19E EV/EBITDA

Headline valuations are a premium to its peers (Fig 6) due to depressed earnings. However, we believe there is underlying value to normalized valuations of 15.0x FY19E EV/EBTIDA. Value is expected to be unlocked over the next 12-18 months, primarily through operational cost savings and refinanced borrowing cost. Strategically, Fortis offers greater scale, accelerates healthcare penetration into India and compliments existing geographical spread, into the more lucrative northern region of India.

Value Accretion Dependent on Acceptance Level

We expect the acquisition to be value accretive to existing IHH shareholders at a range of RM7.55-RM7.65 from our existing IHH valuation of RM7.10 (Fig 7) without straining the balance sheet at 1.4x-2.1x net debtEBITDA. The penultimate valuation is dependent on the acceptance level of Fortis’ open offer.

Maintain BUY With Unchanged SOP-derived TP of RM7.10

We reaffirm our BUY rating on IHH with a 12-month SOP-derived TP of RM7.10. We believe IHH is on track for an organic earnings recovery driven by narrowing losses heading into FY19. Coupled with the Fortis acquisition, it draws IHH closer to the much anticipated pipeline of growth. Downside risk: unfavourable forex, heightened regulatory hurdles and underwhelming execution.

Source: Affin Hwang Research - 16 Jul 2018