We downgrade Fortis Healthcare Ltd to ‘neutral’ from ‘overweight’ and assign a target price of R113 based on sum-of-the-parts valuations.
We value the India business at 15x (unchanged and in line with sector) EV/Ebitda, international business at 12x (unchanged, 20% discount to India business due to lower margins) EV/Ebitda and 28% RHT stake at the current market price. Fortis has announced it will sell its 100% stake in Quality Healthcare (QH), Hong Kong, to Bupa for $355 million. QH contributed c16% of Fortis total revenues in FY13. Fortis had paid $193 million in 2010 to buy QH, which is the largest provider of healthcare services to corporations in Hong Kong.
The divestment is in line with Fortis’ renewed strategy to focus on core businesses in India, and is the third disposal after Dental Corp Australia and Hoan My, Vietnam. The Indian business will now constitute c95% of the total company revenue, up from 48% at the end of FY13. The transaction is expected to be completed at the end of October and we, therefore, do not incorporate it in our estimates, which are unchanged.
The company had reduced net debt/equity from 1.6x as at September 30, 2012, (net debt cR5,200 crore) to current 0.6x following a series of corporate actions and sales of Dental Corp and Hoan My business. QH divestment will bring this to less than 0.3x (net debt cINR12bn by FY14 end). Overall, the company has raised funds of c$1.4 billion in last 12-months, of which half is through divestment of international assets. As per management, target net debt/equity at 0.5x would be comfortable. After QH divestment, net debt/equity is below 0.3x.