Investment Highlights

• We maintain our HOLD recommendation on IHH Healthcare with a lower FV of RM5.53 based on DCF (WACC 8.3%; terminal growth rate 3.5%). We cut our FY19F–FY21F earnings forecast by 8.0%–.4%.

• 1HFY19 core net profit of RM428.5mil (+13.6% YoY) came in below expectations at only 37.8% and 39.9% of our fullyear forecast and the full-year consensus estimates respectively. The variance against our forecast came largely from a higher-than-expected tax expense (due to certain non-taxable income and non-tax deductible expenses, unrecognized tax losses from new hospitals, and tax cash on dividends received from RHT Health Trust).

• IHH’s 1HFY19 top line grew 32.2% YoY to RM7,288.0mil on the back of sustained growth of its existing operations, continuous ramp-up of its Hong Kong and Turkey operations, and the acquisition of Amanjaya and Fortis in 4QFY18.

• IHH’s EBITDA margin fell 1.6ppts to 24.8% with an EBITDA of RM1,810.2mil (+24.1% YoY) in 1HFY19. This was due to the drag from a generally lower-margin Fortis operations (Fortis contributed circa 18.5% of 1HFY19 sales).

• The core net profit improved 13.6% to RM428.5mil due to stronger operational performance and lower foreign exchange loss but dragged by a higher effective tax rate.

• Segmental highlights are as follows; 1. Parkway Pantai’s revenue climbed 48.3% YoY to RM5,198.4mil (RM3,505.2mil in 1HFY18) in 1HFY19 due to the continuous ramp-up of Gleneagles Hong Kong

(GHK), and a contribution of RM14.9mil by Amanjaya and RM1,346.1mil by Fortis. This is after taking out the one-off RM28.5mil trustee management fee income from the disposal of RHT assets. Its EBITDA rose 39.6% to RM1,587.4mil boosted by GHK’s lower start-up losses of RM67.8mil (RM89.3mil in 1HFY18) as a result of operating leverage.

2. Acibadem Holdings revenue increased 2.7% YoY to RM1,862.6mil while EBITDA surged 41.5% YoY to RM420.6mil. Its inpatient admission decreased 4.2% to 112,517 due to less local patients at its non-Istanbul hospitals. However, its revenue intensity grew 28.4% to RM8,451 due to the price increase imposed on private insurance and out-of-pocket patients to compensate for inflation, more complex cases taken and increase in foreign patients.

• Key takeaways from last Friday’s tele-conference are as follows:

1. Medical tourist admissions increased in Singapore, Malaysia and Turkey. GHK saw reduced medical tourists from China due to the protests in Hong Kong. However, occupancy remains strong at 62% of its 150 beds. Moving forward, the group expects losses to narrow further as it continues to ramp up its operations;

2. IHH’s Gleneagles Chengdu Hospital will open in late FY19 while Gleneagles Shanghai Hospital is slated to open in late FY20. Margin dilution is anticipated as pre-operating costs and gestational costs begin; and

3. Acibadem Holding repaid US$250mil of its outstanding US$670mil equivalent non-Turkish lira debt in April 2019 and refinanced circa US$170mil, and swapped around half of it into Turkish lira debt in July 2019, as part of its efforts to deleverage its balance sheet. We believe this will reduce its foreign exchange exposure and lower cost of debt moving forward.

• We expect the group to continue to grow on the back of sustained demand growth in all of its markets, expansion in multiple countries, continuous improvement in patient admission volumes, improved revenue intensity with more complex cases and case mix, better operating leverage and tighter cost controls. However, these will be partly dragged by possible pricing controls, pre-operating and start-up costs of new operations and wage inflation.

• 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 over 20%. However, we are wary of the geopolitical risks from its Turkish and China operations due to volatile currency and political climate.

Source: AmInvest Research - 3 Sept 2019