IHH via teleconferencing held a briefing with the sell-side analysts to explain and dispel scepticism on qualified opinion by the auditors no thanks to Fortis’s. However, we are unsure on potential future provisions on Fortis, if any, upon completion of the audit findings by end FY19. No changes to our FY19E/FY20E earnings forecasts for now. Reiterate UP. TP is RM5.15 based on SoP valuation.

Fortis’ qualified opinion explained… in an effort to dispel and placate investors’ concerns with regards to auditors’ latest qualified opinion in relation to on 31.1%-owned Fortis. IHH does not see significant risk from the auditors' qualified opinion on Fortis in terms of additional provisions. IHH explained that steps and measures have been taken which include review and improve financial reporting processes and enhancing authorisation levels for payments or transfer of funds within the Fortis Group. With the blessings from Securities and Exchange Board of India (SEBI), Fortis has taken steps to recover dues from former controlling shareholders of Fortis to the tune of RM265m to RM275m of which the group is confident of recovering. Elsewhere, IHH has initiated an independent forensic audit on the operations of Fortis Group, which is expected to be completed before 31 December 2019.

No impairment required so far on Fortis. Based on IHH’s impairment testing of goodwill over Fortis for 31 December 2018, there is no impairment required. They will perform the next annual impairment testing of goodwill in Fortis towards end of 2019.

Pare down USD250m loans to mitigate non-cash forex loss. Plans are currently underway to recapitalise USD250m existing subordinated loans will help to reduce the non-cash forex loss related to non-Turkish Lira borrowings. The group indicated that Bank Negara Malaysia has given the green light and is now waiting for the formal approval. Subsequently, the group will have remaining USD430m of debt denominated in USD and Euro and is looking to refinance the debt. When refinancing it, they are looking to swap the 50% of the USD430m into local Turkish lira (US$200m –US$250m into lira) and the remainder to be refinanced into either US or EURO. While we see the repayment of the entire non-Turkish Lira debt as a positive, which is expected to reduce swings in forex translation, this, however, comes with the drawback of a higher interest rate.

Outlook. In view of the on-going investigations, Fortis's auditors are unable to ascertain the quantum of both divergence of funds and the adjustments required to the financials. Since IHH acquired Fortis in November 2018, there have been no further findings that require additional adjustments to Fortis' financial accounts. However, we remained cautious on Fortis in terms of additional findings, which could pose risks in terms provisions. Looking ahead, over the medium term, IHH is expected to face tough operating conditions on the back of: (i) the uncertain Turkish Lira which has depreciated significantly against USD, Euro and MYR with continued volatility, and (ii) execution risk at Fortis as well as uncertainty over its timeline in terms of a turnaround to profitability.

Maintain UNDERPERFORM. We maintain our earnings forecasts for now and sum-of-parts (SoP) TP of RM5.15, implying 42.9x FY19E PER.

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

Source: Kenanga Research - 9 Apr 2019