With a gearing ratio now of 0.26 times, the group CFO of IHH Healthcare Joerg Ayrle is aware that the healthcare giant’s balance sheet can be stretched. Barely half a year into this job, he is already helping to weigh options on how to make better use of the company’s capital. “Now, is it 0.8 times, or 1? I think we’ve not come to a final landing on that. But what is clear is 0.3 is not where we should be in the long term,” says Ayrle in an interview with The Edge Singapore.
One way to please shareholders is to give back excess capital. However, Ayrle believes that the healthcare industry, underpinned by broader trends of demographics and growing affluence, is now in one of its “most dynamic” periods. As such, IHH is leaning towards making more acquisitions, and there are a few options on the menu.
For example, IHH runs a diagnostic business that is seeing growing demand and therefore a market to bulk up in. IHH has selected the Indian subcontinent as one with lots more potential and where it wants to grow “substantially”. Even in mature markets of Europe, there is potential to pick up stable, income-generating businesses too. “We should be able to find assets that we want to invest in, and I think we will see soon that there are areas where we can deploy capital,” he says.
However, this itch towards more M&A does not mean IHH is on a one-track bid to acquire. Its business plans are constantly weighed against other considerations, such as giving itself the financial flexibility.
On July 14, Parkwaylife REIT announced it has been granted rights of first refusal by IHH for the Mount Elizabeth Novena Hospital, when the asset is up for sale. If and when the sale happens, IHH Healthcare will gain more cash to reinvest elsewhere.
The REIT, which already owns three other hospitals, also announced renewal of the master lease for another 20 years to 2042. As part of the agreement, the REIT will spend $150 million to upgrade the three hospitals, to help draw in more patients.
Similarly, while India is stated as one key market where IHH is hunting, it divested its 50% stake in a joint venture in Apollo Gleneagles Hospital in Kolkata for RM227.08 million ($89.1 million) to its partner, who is actually an industry competitor and therefore “prudent” for IHH — given the chance — to take the money and reinvest elsewhere. “We have a cleansing of our portfolio, and some parts of the portfolio that doesn’t fit us well, we redeploy in other areas,” Ayrle explains.
Another way to grow is to embark on a new project from scratch. Instead of buying over an existing hospital, for example, IHH could perhaps do a greenfield project and thereby have much better control over the design of what is to go into the hospital and how the new hospital is to be run. IHH’s China and Hong Kong projects belong to this category.
However, such projects will take much longer to get up and running, and even longer to generate returns. “From a pure risk perspective, buying existing assets clearly has the better risk profile,” reasons Ayrle. Yet, he is also aware sellers will not let go of income-generating businesses unless there is an attractive multiple. Again, a balance has to be struck, although the appetite for “very large” greenfield projects is not big at this point in time, he adds.
In any case, the sheer size and diversity of IHH is an advantage and it has the luxury of having more options available. Specifically, it already has a portfolio of stable, well-performing cash generators — specifically its three key hospitals in Singapore, and to a smaller extent Malaysia. It also owns high growth assets in India and East Europe. Turkey, another major market for IHH, is somewhere in the middle, with healthy economic growth to be weighed against a certain level of political risks.
Ayrle is inclined to consider Western Europe as well. The economies might be mature and prices lofty. Yet, they are more reliably income generating as well. “As a company, we are looking much more at a portfolio approach. You want to have high growth assets and high growth markets and participate in those. But we are also looking into more stable economies and participating in growth,” he explains.
Acquisitions
To be sure, IHH’s acquisitions are not without the hiccups and undesired delays. For example, a bigger presence has been the company’s ambition for years. On Nov 13, 2018, IHH invested US$1.1 billion for a 31.1% stake in the Fortis hospital chain in India, triggering a mandatory takeover offer to acquire up to 26% of the expanded capital from existing shareholders.
To show it has the resources to fund the acquisition, IHH deposited a sum of RM2 billion in an escrow account. However, it could not move forward with the open offer due to an order by India’s Supreme Court because of a move by Japanese pharmaceutical company Daiichi Sankyo to enforce a US$390 million ($528.5 million) arbitration award it won in a Singapore tribunal against Fortis’ previous controlling shareholders — brothers Malvinder and Shivinder Singh — over another deal.
Ayrle is “confident” that in the next few weeks, the court can come to a decision and once this is resolved, Fortis, which is already under IHH’s operational control, will be put on a capacity expansion path to meet unmet demand. “The Fortis franchise is an amazing business. It is earning money now and we’re quite bullish on growth,” says Ayrle, referring to the 68% y-o-y Ebitda growth to RM116.4 million reported by Fortis for 1QFY2021 ended March.
For IHH shareholders, a successful resolution in India means an overhang on IHH’s share price will be removed. For the two most recent quarters, its earnings have improved from the lows caused by the pandemic. The different markets will show somewhat different earnings but overall, things are looking up. For IHH as a whole, it reported 1QFY2021 earnings of RM375.6 million, up 217% y-o-y. “I’m pretty confident for the remainder of the year, we will look rather positive in these coming quarters,” says Ayrle.
Financial backbone
Interestingly, Ayrle came from a different market (Thailand) and industry (food manufacturing) before taking on this job at IHH. Yet, he sees plenty of similarities between IHH and Thai Union Group, where he spent seven years in a similar group CFO capacity. When he joined the Thai company, it was embarking on an acquisition spree.
However, to really enjoy the benefits of a bigger organisation, there is a need to have a proper integration with the “sturdy corporate financial and governance backbone” in place. “That was my key focus the last seven years in Thai Union. And this is one of the reasons I joined here,” says Ayrle.
The massive healthcare operator that is IHH, with a market value of RM49.5 billion as of July 13, was formed via a series of acquisitions with Malaysia’s sovereign wealth fund driving the charge over the past decade or so. Given his way, Ayrle is not content to sit in the background and merely make sure the historical numbers to be recorded on the books are in order. As a finance specialist, he wants to be a key partner in the C-suite, and lead a team to provide the analysis, insights and recommendations on how to grow the business. One example is in terms of capital allocation.
Helping to stretch the balance sheet, for one, is a role he relishes. “The finance function has to rethink and reimagine, to be a partner, a strategic value architect, rather than being only a guardian and a policeman recording where something went wrong,” he says.
As the group CFO overseeing treasury operations, Ayrle can directly help the subsidiaries. For example, he can help the subsidiaries refinance at a cheaper cost by drawing on funds from the treasury. Or, he can help generate better returns by allowing the subsidiaries to deposit their excess funds with headquarters than with an external bank. Regardless, the way such operations are carried out, at the end of the day it is about getting the buy-in from the other colleagues and working towards the common goal.
ROE target
One company-wide goal, which has been publicly articulated before Ayrle comes on board, is to double its return on equity (ROE) in the five years to 2024. When the goal was announced last March, its ROE was around 3%. It dropped to as low as - 0.7% in 2QFY2020, and has reached 4.5% as at 1QFY2021.
The way Ayrle sees it, the ROE can be lifted via a combination of factors. First, the medical tourists, a major earnings contributor to IHH’s Singapore hospitals, got to be back. Next, operational efficiencies, cost savings, got to be improved. He agrees that some doctors might have a specific preference to use certain machinery or prescribe certain drugs, thereby keeping costs lofty. “If you discuss openly and transparently, people do choose the most economical way to do things. In most cases, you have people who want to help you implement affordable health care and they are looking at input-output ratios. So I think it’s a question on how do you moderate this discussion,” he reasons.
In addition to hitting the ROE target, Ayrle is hoping to improve IHH’s trading liquidity. The company is dual-listed first on the Bursa Malaysia and then on the Singapore Exchange. However, the company — despite its size — is rather tightly held with its four largest shareholders holding around three-quarters of the total share base. They are, in this order: Japanese trading house Mitsui (32.9%), Malaysia’s sovereign wealth fund Khazanah Nasional (26.02%) and Employees Provident Fund Board (9.91%) as well as Acibadem founder Mehmet Ali Aydinlar’s 4.8%, who in 2012 was partly paid for 90% the Turkish hospital chain he founded in IHH shares.
Ayrle rues that the trading volume “is probably at the low end of where we would like to have it. We’re not considering at this stage any change in our listing strategy. We’re also not considering any listing anywhere else. But we do look very carefully into our shareholder listings. And think actively how we can drive and inspire a higher liquidity in our stock.”
He hopes that by helping to lead IHH in more significant corporate actions, new investors, ranging from retail investors to other international institutional types, will take notice and come on board.
Of course, in order for that to happen, the IHH’s management needs to show that the operating numbers are moving in the right direction. “A lot depends on whether we as management can show inspiration, and can show the fantasy where the stock price should be going to. And it is our job to communicate where the company is headed, how the business is doing and what our strategies for growth are. And I think then, liquidity will just follow,” he adds.
