Maintain buy on Fortis Healthcare with target price of R180 per share using the SoTP approach. We value Fortis’ hospitals business at 14x FY17e ebitdaR – c20% discount to Apollo Hospitals, given the latter’s healthier cash generation & steadier execution – arriving at a value of R115 per share for its hospitals business. We value the diagnostics business at 16x FY17e ebitda – we use a higher multiple (c15% premium) vis-à-vis Hospital given the former’s superior cashflow profile, margins and lower capital intensity – arriving at a value of R45 per share for its diagnostics business. We value Fortis’ 28% stake in RHT at R20 per share – using a 10% discount to the current market valuation.
Fortis’ Q3 results were operationally in line with the expectations. The focus is firmly back on India with international assets now contributing less than 2% of revenues. Hospitals business saw a smart improvement in ARPOB, ALOS and ebitdaC margin while Diagnostic margins surprised negatively.
We expect Fortis to see meaningful growth over the next few years. Recently commissioned hospitals are past the early ramp-up phase and are now generating positive ebitda. We continue to believe that the stock can re rate if the company is able to regain the confidence of investors with consistent execution.
Citi
