Quoting TheEdgeMarkets.com, IHH is reportedly in talks to sell its 62%-owned Continental Hospitals and 74%-owned Global Hospitals. We see this potential sale as having immediate positive impact to IHH, albeit marginal, as the disposals of these 2 loss makers would help reduce its losses in India. On the flip side, the divestment could be seen in the light of India being a tough operating environment. No changes to our FY19E/FY20E earnings forecasts for now. Reiterate UP. TP is RM4.85 based on SoP valuation.

Speculation is rife over divestment of its 62%-owned Continental Hospitals and 74%-owned Global Hospitals. Quoting TheEdge Markets.com, IHH is reportedly in talks to sell 62%-owned Continental Hospitals and 74%-owned Global Hospitals back to the promoter family. Quoting multiple sources, IHH is believed to be open to divest the stakes at almost half the value it paid. We believe this would be mildly positive to IHH considering that the removal of losses at both Global and Continental are expected to help reduce its losses in India which had continued to widen in 1HFY19 to RM134m compared to RM19.6m in 1HFY18. On the flip side, the divestment could be seen in the light of India being a tough operating environment. Further compounding IHH woes in India are the issues at Fortis including an auditor’s qualified audit report in FY18, risk of more provisions, and lapses in internal controls, leading to regulatory probing, which could well mean execution risk.

Recall, Global Hospitals was acquired for a cash consideration of RM819m while its enterprise value was RM1.1b (including RM251m net debt) in year 2015. Global Hospitals is one of the largest healthcare providers in India with presence in cities such as Mumbai, Bengaluru, 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 pioneering in Multi-Organ Transplants including kidneys, liver, heart and lung.

The 62%-owned Continental Hospitals was acquired for RM167m (51% stake) or RM203m (62% stake assuming based on 51% stake acquired at RM167m gross up to 100%).

Impact to financials. For illustrative purposes, assuming the acquisitions are divested at 60% of its purchase value, IHH will record an estimated proceeds of RM600m-RM700m. The aggregate of both Global and Continental is negative EBITDA of RM13m as at 30 June 2019. The aggregate losses at Global and Continental accounts for 2% of our FY20E net profit forecast. The divestment will ease IHH’s net debt and net gearing from RM4.25b and 0.19x to RM3.55b and 0.16x, respectively, as at 30 June 2019.

Outlook. The group has pared down US$250m equivalent of its nonLira debt for Acibadem in April as part of on-going plan to reduce the exposure to Turkish Lira’s volatility. The remaining balance of US$300m is expected to be pared down sometime in 2020. We are concerned over issues at Fortis, including an auditor’s qualified audit report in FY18, risk of more provisions, and lapses in internal controls, which led to the regulatory probing, which could well mean execution risk.

Maintain UNDERPERFORM. TP is RM4.85 based on SoP valuation, implying 38x FY20E EPS (-1.0SD below 5-year historical forward mean).

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

Source: Kenanga Research - 24 Oct 2019