Fortis?s move to buy TPG Capital?s stake in Parkway Holdings makes it the largest hospital company from India and a serious player in several Asian markets. Parkway is a high quality asset with strong growth prospects which, along with the fact that Fortis gets management control, explains the high valuations ? c21 xCY11E EV/EBIDTA based on Citi estimates.
Fortis has signed a definitive agreement to acquire TPG Capital?s 23.9% stake in Parkway Holdings (Singapore) for US$685.3 million. It intends to seek four seats on the board and nominate its current chairman, Malvinder Singh, as the chairman of Parkway.
Parkway is a leading healthcare provider, present across Singapore (1,022 beds), Malaysia (1,900 beds), India (425 beds), UAE (260 beds), Brunei (20 beds) and China (14 beds). It also has a GP clinic network (Parkway Shenton) and provides radiology (Medi-Rad Associates) and lab services (Parkway Laboratory Services). Besides, it owns a 35.4% stake in Parkway Life REIT, which invests in healthcare/healthcare-related real estate assets. In CY09, it had revenues, EBITDA & rec. PAT of S$979m, S$194 million and S$118 million respectively.
The deal makes Fortis a leading player in Asia, with a network of 62 hospitals and 10,000-plus beds, giving them a Pan-Asia platform. While direct synergies are few, there would be significant intangible upside through sharing of multi-specialty capabilities and medical know-how, access to cutting edge technology in stem cell therapy and organ transplantation.
The deal values Parkway at US$2.8 billion and works out to EV/EBIDTA of 23xCY10E & 21xCY11E (based on Citi analyst, Horng Han Low?s estimates). This appears a tad expensive to us and possibly reflects the intangible upsides that Fortis hopes to gain from the acquisition. The outlay of US $685.3 million is quite high in relation to Fortis? balance sheet?even assuming a 1:1 debt – equity ratio for the company, we believe Fortis will have to raise significant debt and some equity to fund this deal.
Fortis Healthcare was incorporated in 1996, set up and owned by the erstwhile founders of Ranbaxy Laboratories. The management team is headed by Shivinder Singh. The company went public in May 2007. It is one of the largest hospital chains in India with a network of 27 hospitals and over 3,000 beds under management. Fortis plans to expand its network to 40 hospitals and 6,000 beds by FY12. Recently it has entered into an agreement to acquire ten hospitals from Wockhardt Hospitals.
We rate Fortis as Sell/Medium Risk (3M) with a target price of Rs 110. While Fortis looks well placed to gain from the growing market for healthcare delivery services in India over the longer term, at current levels it is one of the most expensive hospital stocks globally and upside is limited.
Valuation: Our target price for Fortis is Rs 110. Fortis has only one directly comparable company listed on the Indian market? Apollo Hospitals. While we believe it is fair to value both hospitals at similar multiples given that Fortis? faster growth offsets Apollo?s scale benefits, we value Fortis at a slight premium, at 15x EBITDA, to adjust for the fact that we have not built in the potentially accretive WHL acquisition to our estimates. Our current EV/EBIDTA multiple of 15x is also in the range that Fortis has traded over the last several years. At 15x Sept-2010E EBITDA we arrive at a target price of Rs 110.
Risks: Our risk rating for Fortis is Medium. With things improving on the issues of capital constraint, geographical concentration, and its relatively lower base of operating beds/revenues, we believe a lower risk rating is appropriate. Key upside risks to our rating and target price include: (1) faster than expected ramp up in occupancy rates, especially in Escorts, could lead to the company beating our earnings estimates; (2) better than expected performance of the WHL acquisition, could change the outlook for the stock; and (3) any progress on Fortis? plan to unlock value in its land holding could also trigger an upward move in the stock.
Parkway
Valuation: Our target price for Parkway is S $3.40, based on ~25x 12-mth forward P/E. At the start of 2002, shares traded at P/Es of 15-20x. A re-rating from mid-2004 to end-2006 took the trading range to 20-30x. In 2007, the shares traded between 30x and 45x on expectations of a spin-off of its hospitals into a REIT, and a subsequent return of capital to shareholders. Our 25x target multiple will bring it to the mean valuation (2004-present) of 25x, which reflects reduced risk to earnings and our increased confidence in Parkway?s international expansion plans.
Risks: We rate Parkway Low risk in view of earnings stability and much healthier balance sheet (0.4x net debt equity). Downside risks that could prevent the stock from achieving our target price are: 1) a weak domestic economy resulting in lower than expected private hospital admissions; 2) Malaysia and Thailand stepping up competition against Parkway as foreign patients seek cheaper medical treatment in these two countries; and 3) further equity-raising to reduce debt levels could dampen sentiment and valuations.