IHH Healthcare (IHH) announced that its 31.17%-owned associate firm, Fortis Healthcare Ltd, is divesting Fortis Malar Hospital in Chennai, India, to MGM Healthcare Private Limited, for a total consideration of INR128crore (equivalent to RM71.9m). The impending transaction is structured as an allcash deal and is expected to conclude by the end of Jan 2024, subject to the requisite approvals from the shareholders of both Fortis Healthcare and Fortis Malar Hospitals Limited (FMHL). We gather that Fortis Malar Hospital which consists of c.140 beds, has been Fortis’ second underperforming asset in recent quarters and encountered persistent challenges including legacy issues. We expect the earnings impact to be minimal, as the reduction of a total of 140 beds accounts for only c.1% of the IHH’s total operational beds. Hence, we make no changes to our core earnings forecast and maintain our Outperform call on IHH with an unchanged SOTP-based TP of RM7.63 based on 20x FY24 EV/EBITDA.

• Details of divestment. The divestment of Fortis Malar Hospital to MGM Healthcare will be separated into 4 parts. (1) Fortis Malar Hospital’s entire business operations will be sold for INR45.5crore (RM25.6m); (2) Outpatient department and radiology business operations, along with the associated land and building and adjacent land parcel situated in FHML will be sold for INR47.59crore (RM26.7m); (3) Land and building adjacent to Malar Hospital owned by FHML will be sold for INR11.38crore (RM6.4m); (4) Vacant land adjacent to Malar Hospital owned by Hospitalia Eastern Private Limited (HEPL) will be sold for INR23.53crore (RM13.2m).

• Rationale of divestment. The divestment of Fortis Malar Hospital aligns with Fortis' ongoing portfolio rationalization strategy. Fortis Malar Hospital consists of c.140 beds and has been Fortis’ second underperforming asset in recent quarters with legacy issues. The hospital’s bed occupancy rate (BOR) lingered at low 30% with EBITDA margin <10%. We view this divestment positively as this would strengthen Fortis’ footprint in strategic selected geographic clusters with substantial presence.

• Conclusion. We believe IHH’s long-term earnings trajectory would remain intact, as the Group continues to be committed in identifying and pursuing earnings-enhancing prospects for acquiring strategic assets in Asia and Europe. IHH’s 3QFY23 results will be tentatively announced on 30th Nov. All told, we maintain our Outperform call on IHH with unchanged TP RM7.63.

Source: PublicInvest Research - 27 Nov 2023