KUCHING: Analysts are generally positive on IHH Healthcare Bhd’s (IHH) proposed acquisition of a 73.4 per cent stake in Global Hospitals (Global), India.
The board of directors of IHH announced on Bursa Malaysia that Gleneagles Development Pte Ltd (GDPL), an indirect wholly-owned subsidiary of IHH has on August 28, 2015, entered into definitive ageements to acquire and subscribe 73.4 per cent of the equity interest on a fully diluted basis, in Global at a consideration of 12.84 billion Indian rupees (equivalent to RM819 million).
According to RHB Research Institute Sdn Bhd (RHB Research), the proposed acquisition implied financial year 2015 (FY15) equity value/earnings before interest, tax, depreciation and amortisaiton (EV/EBITDA) multiples of 18 to 24-fold (based on low teens EBITDA margin for Global’s financial year ended (FYE) March 2015).
The research house noted that this was somewhat similar to Apollo Hospitals’ valuation of 22 to 24-fold FY15/16 EV/EBITDA (IHH owns a 10.8 per cent minority interest in Apollo).
RHB Research viewed the acquisition positively as it offers IHH a solid platform for further growth in India.
The research house added that the price paid for Global includes an equity infusion of 2.65 billion Indian rupees of which 300 million Indian rupees would go toward retiring existing debts while the rest is allocated for capital expenditure (capex).
AmResearch noted that while IHH did not disclose how the valuation of the acquisition was arrived at, management said it is reasonable vis-à-vis other deals done.
Notwithstanding, the research house took comfort from the management’s perspective that the acquisition will help fortify IHH’s presence in the India market.
AmResearch’s back-of-the-envelope calculations suggest that the acquisition has minimal impact on IHH Healthcare’s bottom line, at least in the short-to-mid term.
“Assuming 20 per cent revenue growth and 12 per cent EBITDA margin for FY16F, IHH will only see an EBITDA contribution of RM44 million from Global Hospitals,” it said.
Overall, the research house was positive on the acquisition, but it maintained its numbers for now.
AmResearch maintained ‘hold’ on IHH with an unchanged sum of parts (SOP)-based fair value of RM5.55 per share.
There were also no changes made to RHB Research’s forecast pending the completion of the acquisition and further clarity on Global’s financials.
RHB Research maintained ‘buy’ on IHH with a sum of the parts (SOTP)-derived target price of RM6.70 per share (14.5 per cent upside).
The research house liked IHH for the group’s resilient earnings growth profile, underpinned by the Singaporean dollar exposure that provides a buffer against potential emerging market (EM) currency weaknesses.
It added that IHH trades at an undemanding 1.1-fold price/earnings to growth (PEG) backed by strong earnings growth compound annual growth rate (CAGR) of 24 per cent over FY15-17F.