Maintain ‘buy’ on Fortis Healthcare with target price of R149. We use the DCF method as metrics such as P/E or EV/ebitda cannot fully value its business in the near term. The key assumption of our DCF model is a 5% terminal growth rate beyond FY24e. We use a cost of equity of 12.5%. Cash flows are discounted back to Sept 2015.
Fortis’ Q2 result was in line with expectations at with level ebitda after adjusting for one-off expenses including a forex loss. Key in the Q2 result was the ebitda margin expansion of 190 bps q-o-q for the domestic hospital business, driven by a reduction in government business across hospitals and closure of facilities at smaller locations.
We expect the company to continue its strategy of focusing on margin rather than just chasing sales growth. CEO Aditya Vij will be transitioning from Fortis by the end of the year, to pursue his family business. Meanwhile, Shivinder Singh, executive vice chairman, will take additional responsibility for the company’s operations until the appointment of a new CEO. In addition, the company has also realigned its team and infused fresh talent from outside in Q2.
For the India hospital business, the company reported sales growth of 12% y-y in Q2 versus 20.3% in Q1. Muted growth in domestic hospital business was due to a conscious decision by the company to reduce its low-margin and high-working capital government business. The diagnostic business reported sales muted sales growth of 6% y-o-y.