Brokers' take: DBS retains 'buy' on IHH with S$2.32 target despite US lawsuit

IT IS premature to determine the estimated potential liability that the legal spat between US fund Emqore Envesecure Private Capital Trust and IHH Healthcare Q0F will have on the latter, as it involves a number of defendants and non-party defendants, said DBS Group Research.

Emqore is seeking over US$6.5 billion in damages in a lawsuit against the mainboard-listed company and other defendants.

The lawsuit involves the issuance of shares of India's Fortis Healthcare to IHH's subsidiary back in 2018.

Emqore alleges that it suffered losses as the defendants had purportedly conspired to frustrate a proposed share acquisition transaction between Fortis and Emqore's supposed predecessors.

However, while the lawsuit of US$6.5 billion appears to be a large amount at first glance, DBS analysts noted that IHH is confident it has strong grounds to seek dismissal for Emqore's claims.

And so long as IHH is successful in obtaining the dismissal swiftly, the near-term overhang on the company's share price, as well as Fortis Healthcare, will be temporary, said DBS.

In a research note on Thursday (Jan 6), the analysts maintained "buy" on IHH's stock with a target price (TP) of RM7.20 or S$2.32.

Aside from the legal challenges, DBS pointed out that Fortis Healthcare "has been delivering good operational performance since IHH took over management control".

Its share price has risen about 50 per cent from the low before the pandemic, and rerated almost 3 folds since the low in Q3 2019, said DBS.

In a separate research note on the Malaysian healthcare sector on Friday, UOB Kay Hian named IHH as its top pick for the sector for its "resilient, attractive and defensive earnings and increasingly diminished risk tied to operations in emerging markets".

Analyst Philip Wong has a "buy" call for the stock, with a TP of RM7.40.

He said the brokerage's sum of the parts-based TP implies a multiple of 39.8 times its price-to-earnings (PE) estimates for FY2022, which is below its historical 5-year, 12-month forward PE of 45 times.

While the operational earnings drag at IHH's North Asia operations have diminished, Wong noted that IHH Acibadem's operations are being increasingly de-risked with an increasingly foreign patient mix.

About 40 per cent of the latter's revenue is derived from its foreign patients and European operations.

Additionally, Wong believes that domestic impatient volume should recover, anchoring earnings for the healthcare group for 2022.

"The diminished risks and attractive valuations far exceed the uncertainty over Fortis and IHH's initial 31 per cent stake that has been brought into question," he said.

Shares of IHH were trading S$0.02 or 0.9 per cent lower at S$2.16 as at 2.48 pm on Friday.