IHH announced the acquisition of an additional 30% stake in Acibadem as the latter’s shareholders exercised options to convert equity into IHH shares. We are neutral over the development as the additional stake is offset by an enlarged share base. Maintain BUY and a lower TP of RM6.36 as we update our WACC assumption tied to Turkey, independent of the corporate exercise.

Upping Its Stake in Acibadem

IHH announced that Aydinlar (Acibadem’s founder, Mehmet Ali Aydinlar and his wife, Hatice Seher Aydinlar) and Bagan Lalang (wholly owned subsidiary of Khazanah) exercised its options to convert approximately 15% equity interest in Acibadem for 262m new ordinary IHH shares each. In return, IHH will acquire approximately an additional 30% equity interest in Acibadem, bumping its stake to 90% from an existing 60%. The acquisition of IHH shares by Aydinlar and Bagan Lalang requires Bank Negara Malaysia approval and is expected to be completed by end 2018.

Other Details

The options were part of IHH’s acquisition agreement of Acibadem back in 2011. The conversion for 262m new IHH shares each were at the bottom end range under the option agreement, which ranged between a minimum of 262m and a maximum of 393m new shares. Mehmet Ali Aydinlar will continue to own a 10% stake in Acibadem.

Largely Neutral Impact to Valuations

While IHH’s stake in Acibadem will be bumped up to 90% from 60%, the additional 524m new ordinary IHH shares to Aydinlar and Bagan Lalang, represents an enlarged share base of 6.36%. Ultimately, the impact is neutral to our IHH valuations as the higher stake is diluted by the enlarged share base (Fig. 1 and 2). Over the near term, IHH could see larger noncore forex translation losses of its non-Turkish lira-denominated borrowings. That said, management aims to match borrowing and operational currency once the lira stabilises.

Maintain BUY With a Lower SOP-derived TP of RM6.36

Independent of the corporate exercise, we have raised our WACC assumption in our DCF valuation of Acibadem. This is to reflect Turkey’s higher 3-year average 10-year bond yields. It lowers our SOP-derived TP to RM6.36 from RM7.10. Maintain our BUY rating on IHH as we continue to like its 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 leading to widening translation losses on borrowings, heightened regulatory hurdles and underwhelming execution. Changes to shareholder ownership stake

Aside from valuations, the corporate exercise will dilute substantial shareholders, Mitsui and EPF to 16.9% and 8.5% from 18.0% and 9.1% respectively. In contrast, Pulau Memutik (Khazanah) and MAA’s stake will be marginally enhanced to 40.9% and 6.0% from 40.3% and 3.2% respectively.

Source: Affin Hwang Research - 9 Oct 2018