In an announcement to Bursa Malaysia, IHH, in a last-ditch attempt to push through the acquisition of Fortis Healthcare Ltd, has raised its bid by 9% from INR160/share to INR175/share. In terms of total consideration, the revised proposal is the same as the previous offer, i.e. to infuse up to INR4,000 crores into Fortis. In our view, this latest corporate move highlights IHH’s seriousness and commitment towards securing a stake in Fortis. Reiterate UNDERPERFORM. TP is RM4.90 based on SoP valuation.

Offer to buy Fortis raised by 9% to INR175/share. In an announcement to Bursa Malaysia, IHH, in a last-ditch attempt to push through the acquisition of Fortis has announced a revised proposal. Essentially in terms of total consideration, the revised proposal is the same as the previous offer i.e. to infuse up to INR4,000 crores into Fortis through a preferential allotment of equity shares at a revised price of INR175/share or 9% higher than its previous bid of INR160/share. Recall, in the previous bid, the revised offer entails IHH to immediately inject RM382m (which is status quo) into Fortis or based on a preferential issue and allotment of equity shares without any due diligence in order to make the offer binding. The remaining INR 3,350 crore (RM1.97b) is subject to completion of a due diligence. In our view, this latest effort by IHH highlights its seriousness and commitment towards securing a stake in Fortis. The revised offer is only valid no later than 5pm on 15 May 2018. IHH Healthcare is now the highest bidder for Fortis, followed by Munjal-Burmans, KKR-backed Radiant Life Care and Manipal-TPG.

Impact to financials. We are unsure of the exact stake IHH is acquiring. However, based on INR175/share, the valuations are lofty at 76x PER at FY19E consensus net profit of (RM70.5m). Regional hospital providers are trading at an average of 35-38x PER. The acquisition is expected to raise IHH’s net gearing from 3.3% to 14% as at 31 December 2017. The acquisition can be funded via a USD2bn multicurrency medium-term note programme which was established in July 2017. The proposed acquisition of Fortis is expected to be earnings dilutive in the short to medium term but should gradually be earnings accretive once operations ramp up.

A wide network of hospitals across India. Currently, Fortis operates healthcare delivery services in India, Dubai, Mauritius and Sri Lanka with 45 healthcare facilities (including projects under development), with approximately 10,000 potential beds and 314 diagnostic centres. Fortis would complement IHH’s 72%-owned Global Hospitals, which are predominantly in South India while Fortis’ forte is in the north. However, we expect cannibalisation in cities of which Global Hospitals are operating in i.e. Mumbai, Chennai, Kolkata, Bangalore and Hyderabad.

Maintain UNDERPERFORM. Maintain SoP TP of RM4.90. The stock is currently trading at PERs of 62x on FY18E and 54x on FY19E, which appear rich as compared to its average net profit growth prospects of 10% p.a.

Key upside risk to our call: faster-than-expected ramp up in new hospitals.

Source: Kenanga Research - 3 May 2018