News

According to an announcement in Bursa Malaysia, IHH Healthcare has bought a 73.4% stake in Global Hospitals Group for a cash consideration of INR 12.8b (RM819m). The enterprise value is RM1.1b (including RM251m net debt). The remaining 26.6% will continue to be owned by Global Hospitals’ founder Dr K Ravindranath.

Global Hospitals is one of the largest healthcare providers in India with presence in cities such as Mumbai, Bangalore, Chennai and Hyderabad. It operates a network of 5 hospitals with a total of 1,100-operational beds with potential to expand up to 1,900 beds (within 5 years). Its Multi Super Specialty Tertiary Care facility is spread across Hyderabad, Chennai, Bangalore and Mumbai. Global Hospitals is also a pioneer in Multi-Organ Transplants including kidneys, liver, heart and lung. Current utilisation is 60-70%.

Global Hospitals’ FY13, FY14 and FY15 revenues are RM86m, RM96m and RM116m, respectively. Average revenue per inpatient rose 20% and 25% in FY14 and FY15, respectively.

This acquisition marks IHH’s second acquisition in India this year following the acquisition of Continental Hospitals in 1Q15.

With the acquisition of Global Hospitals and Continental Hospitals in 2015, IHH’s presence in India has grown to ~1,800 beds.

Note that IHH’s 73.4% stake in Global Hospitals is expected to be reduced to 64.4% gradually over the next five years. The 9% reduction will be distributed to the doctors as a form of benefit to incentivise the doctors.

The deal is expected to be completed in three months time.

Comments

This is not new to us and the market as well. This was highlighted in our report dated 6 Aug 2015. We are neutral on this latest corporate development by IHH. The addition of Global Hospitals will further enhance IHH’s capabilities as well as provide a more complete suite of integrated healthcare services to patients and further reinforce its position as the leading private healthcare provider in India and Asia Pacific. However, to a certain extent, Global Hospitals could cannibalise IHH’s existing clients due to friendly competition within the same group of hospitals.

Based on industry research, including World Health Organisation Statistics, the Indian Hospital market is expected to grow by a CAGR of 16% from 2011 to 2020. This should benefit IHH considering that with this acquisition, IHH has presence in 4 of the top 7 cities in India.

We understand that Global Hospitals is EBITDA positive with margins at low teens. This simply means that Global Hospitals has yet to achieve breakeven at the bottomline.

No indication of when Global is expected to be profitable; however, management is hopeful of consistently improving EBITDA and hence bottomline.

This acquisition would only put a small dent to IHH’s net gearing, which stood at 12% as at 30 June 2015.

Outlook

Growth driver in the next five years will come from the following:- (i) In Singapore, the gradual ramp up of Mount Elizabeth Novena, (ii) In Malaysia, PPL is currently undertaking expansion projects in four hospitals, Gleneagles Kuala Lumpur (schedule to open by 2H15), Pantai Hospital Kuala Lumpur (phase 1 to commence operation in Mar15), Pantai Hospital Klang (expected completion end 2016) and Pantai Hospital Ayer Keroh (expected completion end-2017). Greenfield projects meanwhile, namely Gleneagles Kota Kinabalu (to commence operation in May15) and Gleneagles Medini (phase 1, 150 beds target completion in 2H15), (iii) in Turkey, Acibadem is currently undertaking expansion projects for Acibadem Sistina (target completion 3Q15) Skopje Clinical Hospital, Acibadem Bodrum (target completion in 3Q15), Acibadem Maslak Hospital (target completion in 2017) and Acibadem Taksim (target completion in 2H15).

Forecast

No changes to our FY15E and FY16E numbers.

Rating & Valuation

Maintain UNDERPERFORM. Our target price is RM5.00 based on SoP. The stock is currently trading at PERs of 57x for FY15E and 52x for FY16E, which appear rich as compared to its average net profit growth of 11% p.a. over FY15E and FY16E.

Risks to Our Call

Faster-than-expected expansion in its greenfield and brownfield projects.

Source: Kenanga Research - 1 Sep 2015