While the Parkway acquisition is a long term positive for Fortis Healthcare, the upsides are priced in.
India’s second largest listed healthcare provider, Fortis Healthcare, has taken a big step in an effort to increase its international presence by acquiring a 23.9 per cent stake in Singapore-based Parkway Holdings for $685.3 million (Rs 3,118 crore). Though it is not acquiring a majority stake, being the largest shareholder in Parkway will help Fortis to take management control. The move is expected to make it India’s largest listed healthcare services provider with over 10,000 beds and give it a presence in six countries in the Asian region.
The Parkway acquisition
Parkway Holdings, which had revenues of $699 million (Rs 3,409 crore) in CY09, offers healthcare related services through three group companies-- ParkwayHealth, Parkway Education and ParkwayLife REIT.
| BRIDGING THE GAP | ||||
| FY10 E | FY11 E | |||
| Fortis | Apollo | Fortis | Apollo | |
| Number of beds | 6,609 | 8,000 | 7,943 | 9,000 |
| P/E (x) | 97.28 | 33.80 | 53 | 29.3 |
| EV/Ebidta (x) | 42.00 | 17.10 | 25 | 14.2 |
| EV/bed (Rs lakh) | 91.56 | 59.70 | 75.41 | 52.88 |
| *Source: Bloomberg, Analyst estimates | ||||
ParkwayHealth offers healthcare services through its chain of 16 hospitals in Singapore with 1,022 beds, Malaysia (1,900 beds), Brunei (20 beds), India (425 beds in a JV with Apollo Hospitals), UAE (260 beds) and China (14 beds). Parkway Education imparts healthcare education and training. ParkwayLife REIT is a healthcare real estate firm listed on the Singapore stock exchange in which Parkway Holdings has a 35 per cent stake. The REIT currently owns 21 properties including three major Singapore-based hospitals which it leases out for rental payments to the Parkway group. While Parkway will give Fortis an entry into the South East and West Asian markets, did it pay too much?
Deal valuations
Fortis is paying a 14 per cent premium on the trading price for a stake in Parkway which values the company at $2.8 billion. A Citi report values the company (Parkway) at an EV/Ebdita of 23 times CY10 earnings which is expensive considering that other players in the region are quoting at single digit or low double digit (10-12) valuations.
| THE DEAL |
| * Forits Healtcare has picked up 24 per cent stake in Singapore-based healthcare services provider Parkway |
| * Being the largest shareholder, the deal is likely to give Fortis management control of the firm |
| * At $685.3 million (Rs 3,118 crore), Fortis paid a premium of 14 per cent to Parkway's share price |
| * Combined offering of 10,000 beds makes its the largest healthcare provider in India and some South East Asian countries |
| * Fourth acquisition for Fortis after Malar Hospitals, Escorts Heart Institute and Wockhardt Hospitals |
While strictly not comparable, Fortis Healthcare is available at 25 times and Apollo Hospitals its nearest competitor are available at 14 times estimated 2010-11 EV/Ebdita. Also, on the EV to bed parameter, the acquisition comes at Rs 3.7 crore which is much higher than Fortis’ Rs 91 lakh by a factor of 4. This is quite high even after discounting for the fact that Singapore (accounts for 60 per cent of the Parkway’s revenues) is a more mature market with a higher per capita income than India and the company’s operating profit margins at 24 per cent are higher than the 17 per cent recorded by Fortis.
| ACHIEVING SCALE | ||
| in Rs crore | Fortis 9MFY10 | Parkway CY09 |
| Beds | 6,609 | 3,409 |
| Hospitals | 45 | 16 |
| Occupancy (%) * | 74.00 | 62.7 |
| Sales | 770.00 | 3,181 |
| Operating profit | 118.41 | 770 |
| OPM (%) | 15.4 | 24.2 |
| Net profit | 50.7 | 380 |
| * for nine mths to Dec'09 Source: Companies | ||
Future growth
Though the Fortis management believes that the Indian operations will benefit from the skill sets, technology and capability of Parkway in addition to the opportunity of the healthcare tourism market in the region, a large chunk of growth for the Fortis group will continue to come from its India operations. The opportunity given the growth rates (pegged at 15 per cent CAGR FY06-FY12) and the size of the Indian market ($34 billion currently; expected to reach $52 billion by FY12) are significantly higher than those of the South East Asian market. In addition to the skill set and technology exchange, Fortis could exchange patients based on complexity of healthcare needed as well as affordability.
Improving parameters
Through acquisitions and organic growth Fortis has increased the number of beds it operates by three times from under 2,000 in 2005-06 to over 6,000 in 2009-10; thus, revenues have also risen from Rs 297 crore in 2005-06 and are estimated at Rs 940 crore for 2009-10. Going ahead, Fortis’ revenues are expected to more than double to Rs 2,000 crore in 2011-12. Operating profit margins, which were 5 per cent three years ago, improved to 14 per cent in 2008-09. These are expected to hit 21 per cent by 2011-12 as its network of hospitals increase their occupancy levels and the company benefits from scale of operations.
While growth might not be a problem, the company may have issues on funding in the near term. The company, however, expects to bridge the funding gap by using money from the rights issues, warrants issued to promoters and the balance from a FCCB or equity issue. At Rs 177, the stock is trading at an expensive 30.6 times its 2011-12 earnings estimates of Rs 5.8 and incorporates all the upsides.