Investment Highlights

• We maintain our HOLD recommendation on IHH Healthcare (IHH) with a lower FV of RM5.40 (from RM5.50 previously) based on DCF (WACC 8.3%; terminal growth rate 3.5%). We have cut our earnings forecasts for FY19F, FY20F and FY21F by 15.8%, 14.1% and 17.8% respectively. This is to account for higher depreciation, finance cost and effective tax rate expectations.

• 9MFY19 core net profit of RM630.8mil (-8.0%) came in below our and street’s expectations, accounting for only 62.1% and 64.9% of full-year earnings forecasts. The variance against our forecasts was largely due to higher depreciation and finance cost as well as a higher effective tax rate.

• IHH’s 9MFY19 top line grew 32.6% YoY to RM11,076.4mil on the back of sustained growth across all of its existing operations. 9MFY19 PBT margin rose 8.4ppt to 7.6%. This was due to lower FX losses from Acibadem’s non-Turkish lira borrowings. However, its core net profit margin dropped 2.5ppt to 5.7% on higher net interest expenses.

• Segmental highlights are as follows;

1. Parkway Pantai’s revenue climbed 50.3% YoY to RM8,001.0mil in 9MFY19 due to the continuous ramp-up of Gleneagles Hong Kong (GHK) as well as the contribution from Amanjaya (RM23.9mil) and Fortis (RM2,058.1mil).
   
   There was also a one-off RM28.5mil trustee management fee income relating to the disposal of RHT assets. The operational metrics for its hospitals also improved as shown in Exhibit 2.
   
   Inpatient admissions and revenue intensity (average revenue per patient) increased in Parkway Pantai’s Singapore and Malaysia hospitals. However, India hospitals’ revenue intensity decreased in 9MFY19 as Fortis’ revenue intensity is generally lower than its existing operations in India due to the difference in its case mix.
    
2. Acibadem Holdings revenue increased 1.5% YoY to RM2,776.2mil in 9MFY19 while EBITDA surged 38.8% to RM606.7mil. EBITDA margin rose 5.9ppt YoY to 16.0% in 9MFY19. This was on the back of the continuous ramp-up of Acibadem Altunizade Hospital and the expansion of its Acibadem Maslak Hospital.
   
   Medical tourism has also improved in the region. However, its inpatient admissions declined 4.8% YoY in 9MFY19 due to fewer local patients at its non-Istanbul hospitals. Revenue intensity grew 22.6% YoY in 9MFY19 on the back of price increases imposed on private insurance and out-of-pocket patients.

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

1. Medical tourism continued to improve in IHH’s Singapore, Malaysia and Turkey operations. However, GHK saw reduced medical tourists from China due to the protests in Hong Kong. Non-urgent and non-essential procedures were also deferred due to the situation. This resulted in a lower occupancy rate of 58% (62% in 2Q19) of its 150 beds in 3QFY19.
2. IHH’s Gleneagles Chengdu Hospital commenced operations in October 2019 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 and to pare down its Acibadem debt to below US$200mil by end-FY19. We believe this will reduce the group’s foreign exchange exposure moving forward.
4. The proposed acquisition of Prince Court Medical Centre (PCMC) is expected to strengthen the group’s position in Malaysia and enhance its prospects for medical tourism. Medical tourism contributed circa 6% to the group’s operations in Malaysia (circa 3–4% in FY18). The group expects PCMC to contribute positively to its earnings and cash flows when the proposed acquisition is completed. However, we believe there will be a downward pressure in the immediate term as its earnings contribution of circa RM26.0mil will not be enough to cover the net financing cost of the acquisition.

• We expect the group to continue to grow on the back of sustained demand growth in all of its markets, expansion in multiple countries, better operational metrics, and tighter cost controls. Risks to earnings are pricing controls, preoperating 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 the volatile currency and political climate.

Source: AmInvest Research - 2 Dec 2019