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This example was created on March 1, 2017. This is NOT a valuation, forecast, rating, or recommendation; rather, it is a teaching example. What follows is NOT investment advice; rather, it is a teaching example. It is intended only as academic information to those who want to learn about valuation. It should not be construed as the basis for any valuation or investment. The information in this presentation came from various sources that we believe are reliable, though we do not guarantee the accuracy, adequacy or completeness of such information. We hope you enjoy learning about valuation as much as we do!


IHH Healthcare Berhad is a prominent health-care services provider in Asia, Central and Eastern Europe, the Middle East and North Africa.

By market capitalization, it is the second largest listed healthcare operator in the world.

With more than 30,000 employees globally, IHH operates across 10 countries and has close to 10,000 beds in 52 hospitals.

Learning #Valuation with @Andrew_Stotz: IHH HealthcareIHH has three subsidiaries: Parkway Pantai, Acibadem and International Medical University.

Parkway Pantai is the group’s largest subsidiary. It is spread across Singapore, Malaysia, Brunei, India and China. It is the largest private healthcare provider in Singapore and the second largest in Malaysia.

IHH holds a 35% stake in Parkway Life (PREIT SP), a healthcare real estate investment trust with 47 properties, and a 10% stake in Apollo Hospitals (APHS IN), a broad network of facilities mostly in India. We can see the revenue breakdown with 61% coming from Parkway, the main contributor.


In this case, we can see that the company has had an increasing revenue growth rate of 9%, 15% and then 21% over the prior three years.

Learning #Valuation with @Andrew_Stotz: IHH Healthcare

We always want to be careful when a company is in an acceleration phase, because it may not continue forever. In fact, look at net profit growth. It went from 19.5% to 24% to 56%, which is massive. Also we can see that the net margin has increased to 14%.

If we just blindly forecast that forward, we could end up with a 20% net profit margin by the time we get to 2021.

But I think we have to be careful, look at competitors and try to understand what type of profit margin is sustainable for the business.

The forecast is that growth will slow down slightly and that net margin will gradually descend to 12.4%.


We can see that for this company, we’re expecting asset growth. It’s a bit lumpy, but asset growth is always lumpy.

In this case, we’re forecasting that the net fixed asset growth is going to fall quite substantially down to 3.7%, and the total asset growth is going to be about 6% to 7%.

I like to look at the revenue per asset. We can see that it’s been rising here, and I expect it to rise slightly going forward.

Learning #Valuation with @Andrew_Stotz: IHH Healthcare

Liabilities and Equity

If we look at the liabilities of the company, we can see that the dividend payout ratio of the company is rising from 24% to about 33%.

Learning #Valuation with @Andrew_Stotz: IHH Healthcare

Cash Flow

If we look at the cash flow statement, we’re going to see that the operating cash flow is very strong. CAPEX is going to continue to be high, and the net working capital is a small investment for the company.

Learning #Valuation with @Andrew_Stotz: IHH Healthcare

Free Cash Flow

Let’s look at the next subject, which is the absolute valuation we get from these forecasts.

Now, we’re going to look at what are the important items for me: the NOPAT, our forecast and the fade period.

Learning #Valuation with @Andrew_Stotz: IHH Healthcare

You can see that that’s fading down from a very high level. And I look at the amount of CAPEX, which we looked at in the cash flow statement and the change in working capital.

Those are the major items. From that, I can see that free cash flow to the firm has been rising, and I think it will rise further.

But eventually that free cash flow to the firm will start to slow down and even start to fade, which we’ll look at in a second.

Invested Capital

The return on invested capital has gone from 11% to 14% to 15%, so the company is growing its invested capital slowly compared to its profit growth.

Learning #Valuation with @Andrew_Stotz: IHH Healthcare

I don’t see a reason why that can’t continue for a while, but eventually in the fade period it’s going to fall.

Per Share Data

Now we can see that the growth rate in the EPS is 7%, 12% and 13%, and the growth rate in dividends per share is going to be slightly higher this year, because we’re continuing to increase ? and that will drive strong dividends-per-share growth.

Learning #Valuation with @Andrew_Stotz: IHH Healthcare

Cost of Capital

When we look at the cost of capital assumptions, we’ll see that the main concern here is that the equity risk premium estimate, based upon dividend discount model, is about 8%. Based on survey results, 7% is what I’m going to estimate.

Learning #Valuation with @Andrew_Stotz: IHH Healthcare

Remember, this is from now until eternity, so we have to be careful about the assumptions that we make. We don’t want to make extreme assumptions or else we’re going to have extreme values.

For the end result, I’m going to pick a beta of about 0.75, and that’s going to give a cost of equity of about 9%.

There is a 20% tax rate where the company gets some tax shield help when it borrows money, but it doesn’t borrow much ? only about 15%.

The weighted average cost of capital is pretty close right there.

Terminal Factors

Learning #Valuation with @Andrew_Stotz: IHH Healthcare

Now, if we look at the fade, I’m predicting there’s going to be a five-year fade period and that the return of invested capital is going to fade down to the weighted average cost of capital. This means

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