IHH Healthcare - Positive on Disposal of Non-performing Asset

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Investment Highlights

  • We reiterate HOLD on IHH Healthcare (IHH) with an unchanged DCF-derived fair value (FV) of RM6.22/share (WACC of 8.8%; terminal growth rate of 2%), which implies FY24F P/BV of 1.8x, at a 10% discount to its 5-year average of 2.0x. Our FV incorporates a 3% premium due to our unchanged ESG rating of 4-star.
  • Last Friday, IHH announced that 3 subsidiaries of the group’s 31.2%-owned India-based Fortis Healthcare (Fortis) have entered into definitive agreements to dispose a hospital and related assets for a total cash consideration of INR1.28bil (RM71.9mil) to MGM Healthcare. These are the salient highlights:
    (a) The disposal of 140-bedded Fortis Malar Hospital by Fortis Malar Hospitals for INR455mil (or RM25.6mil). Fortis currently has a 62.7% equity stake in Fortis Malar Hospitals;
    (b) The disposal of outpatient department, radiology business operations of Fortis Malar Hospital (including the land and building on which the hospital is situated) as well as land and building adjacent to the hospital by Fortis’ wholly-owned Fortis Health Management (FHML) for INR590mil (RM33.1mil); and
    (c) The disposal of vacant land, currently used as parking premises, adjacent to Fortis Malar Hospital, by Fortis’ wholly-owned Hospitalia Eastern Private (HEPL) for INR235mil (RM13.2mil).
  • The disposal is anticipated to be finalised by Jan 2024, contingent upon the satisfaction of specific conditions and the acquisition of shareholder approvals from Fortis and Fortis Malar Hospitals.
  • We gathered that Fortis Malar Hospital has been facing certain legacy issues, leading to a sub-optimal bed occupancy rates and EBITDA margin of <10% (vs IHH’s Indian operations of 15% in 2HFY23).
  • All in, we positively view the divestment as a move consistent with previous IHH’s guidance on initiatives to enhance Indian operation’s EBITDA margin of 15% in 1QFY23 within 12-18 months by disposing non-performing assets. This is the second disposal of under-performing assets after Vadapalani facility in Jul 2023 for INR1.52bil.
  • Nevertheless, we maintain FY23F-25F earnings on expectations of negligible earnings loss or EBITDA margin enhancement to the group as the disposal amount is immaterial (<1% of market cap) to both Fortis and IHH. Notably, Fortis Malar Hospital accounted for only 3% of Fortis’ total operational beds of 4,500.
  • The stock currently trades at a fair FY24F P/BV of 1.7x – 15% discount to its 5-year average of 2.0x amid slowing global economic growth prospects.

Source: AmInvest Research - 27 Nov 2023

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