Investment Highlights

• We maintain our HOLD recommendation on IHH Healthcare with a higher FV of RM5.58/share after rolling forward our base year to FY20. Our forecasts are unchanged. Our valuation is based on DCF (terminal growth rate: 3.5%, WACC: 8.3%). Our fair value of RM5.58/share implies an FY20F PE of 43.1x.

• We like IHH for: (1) its strong prospects in the private healthcare sector backed by rising affluence and the aging population; and (2) its position in the premium segment of the private healthcare sector, translating to high EBITDA margins of around 20%. However, we are cautious as we believe the group would face risks from its Turkish operations due to the volatile lira and deteriorating macroeconomic conditions.

• 1QFY19 core net profit of RM188.4mil (+56.3% YoY) came in within our and street’s expectations accounting for 16.6% and 17.5% of full-year forecasts respectively. We believe that 1Q is a seasonally weak period. In FY18, 1Q accounted for 13.3% of core net profit.

• IHH’s 1QFY19 topline grew 27.6% YoY to RM3,642.7mil due to growth from existing operations, the ramp-up of Gleneagles Hong Kong and Acibadem Altunizade Hospitals, and the inclusion of Amanjaya and Fortis’ sales contribution of RM7.5mil and RM674.7mil respectively. IHH also benefited from better case mix, higher occupancy rate and increased ASP in Turkey.

• IHH’s EBITDA margin improved 1.0ppt YoY to 22.3% with an EBITDA of RM813.7mil (+33.6% YoY) in 1QFY19. Core net profit soared 56.3% YoY to RM188.4mil in 1QFY19 on stronger operational performance across its segments (see Pg 2) and lower foreign exchange loss of RM12.6mil (forex loss of RM103.9mil in 1QFY18). Amanjaya and Fortis contributed RM2.8mil and RM76.6mil to EBITDA respectively. The group also enjoyed a RM28.5mil trustee management fee income from RHT relating to the disposal of RHT assets. However, this was offset by a higher finance cost of RM295.2mil (+27.9% from RM230.8mil in 1QFY18) and higher tax expense of RM196.0mil (RM60.7mil in 1QFY18) partly due to unrecognized tax losses of Gleneagles Hong Kong.

• In April 2019, Acibadem Holding repaid US$250mil out of the outstanding US$670mil non-Turkish lira debt to deleverage its balance sheet. The company will continue to reduce its debt exposure of around US$360mil equivalent of non-lira debt. As such, we anticipate finance cost to improve in 3QFY19.

Source: AmInvest Research - 31 May 2019