MOSL: FORTIS HEALTHCARE (Buy)-Possibility of three-step value unlocking
​Fortis Healthcare: Possibility of three-step value unlocking
(FORH IN, Mkt Cap USD1.4b, CMP INR198, TP INR240, 21% Upside, Buy)
According to media reports, IHH Healthcare Bhd, Asia’s largest private hospital operator, may announce acquisition of a controlling stake in Fortis Healthcare Ltd (FORH) and SRL Diagnostics. In this note, we have evaluated the possibility of a three-step value unlocking in FORH: 1) IHH/private equity buying a controlling stake in FORH, 2) fresh equity infusion, which will be used to buyback RHT and 3) acquisition of a controlling stake in SRL to help provide exit to the existing private equity players. We have tried and analyzed the impact of all the three events.
Step-1: IHH/private equity buys controlling stake in FORH: According to media reports, IHH may buy a controlling stake in the company from the promoters, valuing FORH at INR140b. This would mean a fair value of INR270/ share (>35% upside from current levels).
Step-2: Fresh equity infusion in FORH to execute RHT buyback; TP will increase by ~20%: RHT is listed in Singapore with a market cap of ~INR35b in INR terms. Given that FORH will pay business trust (BT) cost of >INR4b to RHT in FY19E, at current market cap, RHT trades at 10.75x FY19E EV/EBITDA, significantly below hospital asset valuation of 20-22x forward EV/EBITDA. We believe that the acquisition of RHT will increase EV of FORH by ~INR60b. FORH owns ~30% stake in RHT, and thus, it will have to buy back the remaining stake (worth INR25b), for which it may look to raise fresh equity. Even after assuming dilution through fresh equity (share count increasing from 523m to 642m), our TP for FORH will increase from ~INR240 currently to INR290.
Step-3: Acquisition of controlling stake in SRL can defer demerger: According to media reports, IHH may look to buy controlling stake in SRL. This will help provide partial/complete exit to the existing private equity. According to FORH, the demerger process will complete by July-17 end/ Aug-17 beginning. We believe that the SRL business demerger, coupled with stake acquisition in FHTL and asset sweating in existing hospitals, will help unlock significant value for FORH’s shareholders.
Fortis Healthcare Limited is an integrated healthcare delivery service provider. The Company is engaged in establishing, maintaining, operating, running, managing or administering hospitals, medicare, healthcare, diagnostic, health aids and research centers. The Company operates through the Clinical Establishments Division and the Medical Services Division. The Clinical Establishments Division owns, maintains and operates clinical establishments (being fully air conditioned institutions established, and specifically customized and duly fitted with all fixtures, fittings, certain medical equipment and infrastructure required for running and operating the hospitals), as well as provides services under outpatient division and radio-diagnostic services. The Medical Services Division undertakes the business of running the hospital operations, including in-patient services and emergency services. The Company operates its healthcare delivery services in India, Dubai, Mauritius and Sri Lanka.
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