Fortis Healthcare Acquires 85 Per Cent In Radlink-Asia

Fortis Healthcare, through its subsidiary Fortis Healthcare Singapore Pte, has acquired 85 per cent stake in RadLink Asia Pte for an amount of USD 62.9 million (about Rs 248 crore). The stock touched an intraday high of Rs 108.40 and closed on Rs 106.30. 

RadLink has four main business segments i.e. diagnostic imaging, molecular imaging, cyclotron (nuclear medicine) and GP clinics. Its service offerings include CT coronary angiogram, CT scan, breast MRI, MRI, digital radiography, digital mammography, bone mineral densitometry, fluoroscopy, ultrasound, etc. From the company’s website we understand that it has six medical centers in Singapore. 

The financial performance of RadLink Asia Pte is not available but we checked the performance of the other companies in the same sector. Raffles Medical Group, a Singapore-based healthcare company, for example, recorded about 10 per cent rise in its revenues and a 19 per cent rise in the net profit. Its four-year topline CAGR is 15 per cent. Its operating margins have also increased from 13 per cent to 22 per cent in a span of five years. There were similar results for another company called Parkway Health. 

The domestic growth drivers for the healthcare industry are quite strong. Aging population in Singapore is increasing rapidly and in order to tackle the heavy healthcare spending required in the future, the government is increasing its healthcare budget. It is also restructuring the insurance plans. The private healthcare expenditure in Singapore has been growing faster than its GDP growth which we believe is good for the companies in the healthcare sector. 

Based on the strong growth drivers as well as the robust performance of the individual players in the industry we believe that this acquisition will be good for the growth of Fortis Healthcare. One however needs to look at the financial performance of the company in the last few quarters where its profitability has reduced on a standalone as well as consolidated basis. Its total debt, according to the half yearly statement, was Rs 2,173.32 crore and it had a debt to equity ratio of 0.6. Its total cash of Rs 110 crore indicates that this acquisition will put pressure on its balance-sheet and there is plenty of scope for the current transaction to be funded by raising fresh debt. 

In 2010 the company acquired a 29 per cent stake in Parkway Holdings for USD 685.3 million (over Rs 3,000 crore). This transaction was funded through debt which included FCCBs of USD 100 million. Post the acquisition in September FY11 quarter the company witnessed several-fold growth in its profits. After the company sold its stake in Parkway Holding, it has been showing decline in its profit. For FY11 wherein its sales rose by hefty 58 per cent, its EBITDA decreased by 52 per cent while the company reported loss of over Rs 200 crore against profit of Rs 37 crore in FY10. 

Even in the recent quarter and half year ended September 2011 the company has reported losses. No wonder its share price has tumbled by about 40 per cent in the last 6 months. Even though this acquisition will help Fortis to improve its margins, its quantum remains to be seen. We also have an opinion that the revenues from RadLink will form a small proportion of its consolidated revenues and hence its bottomline impact will remain very small. At its current PE of 64 it is very steep compared to its peers. At this level it is advisable to stay away from Fortis Healthcare.