Key Takeaways From IHH-Fortis Call: RHB IB

RHB Research has attended IHH’s briefing and has reiterated “BUY” rating on this healthcare heavyweight counter. The research house has set IHH’s target price (TP) MYR7.42, 26% upside and 1% FY22F yield. The research team said in its coverage report on IHH that they “walk away from the management briefing feeling upbeat”.

As the mandatory takeover offer (MTO) hurdles appear to be resolved, the incremental earnings contributions (FY23F: c.3%) materialising post MTO would also mean a potential 4% upside revision to its current target price. IHH Healthcare is poised to benefit from the resilient demand for healthcare services and return of medical tourists post border reopenings. The research house SOP-based TP incorporates a 0% ESG premium/discount.

Key summary from the management call. As mentioned earlier, the research team attended IHH’s briefing on the recent judgement from the Honourable Supreme Court of India (Supreme Court). The court declared the company was not found guilty of any wrongdoing pertaining to the Fortis investment. That said, the Supreme Court also disposed the contempt of court petition. Meanwhile, it is understood that the current decision by the court on the acquisition of RHT Health Trust (RHT) by Fortis remains an overhang, as the High Court – the executing court – can still initiate a forensic audit if it deems the transaction as inappropriate. Recall: The acquisition of RHT by Fortis was conducted on 19 Jan 2019 after the status quo order was imposed on 14 Dec 2018.

Pending professional advice on MTO. Post the final court order, IHH is currently in talks with the relevant authorities to determine the next course of action in pursuing the MTO – this is for the remaining 26% stake in Fortis. IHH reiterates its commitment to honour the MTO once the relevant authorities grant the approvals.

The research house feels upbeat post the management briefing, given that the near-term hurdle for IHH has been resolved. However the lingering RHT-Fortis deal may continue to weigh on near-term investor sentiment until the final court order is released. Fortis’ share price has plunged by 17% since the selldown on 21 Sep. Prior to this selldown, the firm accounted for 7.7% of IHH’s market cap based on the latter’s 31% stake in the former. Based on back-of-envelope calculation, the selldown on IHH is deemed as unreasonable, given the implied correction should be only 1.3% – it has dropped 3.1% since 21 Sep.

Earnings adjustment and valuation. RHB Research makes no changes to its earnings estimate pending confirmation from the deal. Once again, it reiterates its BUY call and target price (TP) of MYR7.42, a 0% ESG premium/discount is incorporated to its intrinsic value. If the MTO is successfully carried out, this would mean a potential 4% upside to its current TP and 3% upside to its 2023 core earnings.

Key risks: i) Ongoing litigation, ii) lower-than-expected patient volume/revenue intensity, and iii) higher-than-expected operating costs.

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