Investment Highlights

• We maintain HOLD on IHH Healthcare with a lower FV of RM6.33 (vs. RM6.70 previously), based on DCF (WACC: 8.27%, terminal growth rate: 3.5%). We have rolled forward our valuation base year to FY18.

• Recall that IHH’s 2Q17 results missed our and consensus’ estimates due to the higher-than-expected one-off start-up cost incurred by Gleneagles Hong Kong Hospital (GHK). We have trimmed our earnings forecasts by 35%/33%/17% for FY17/18/19F to account for higher start-up costs and gestation losses from new hospitals.

• We believe the group’s performance will improve from 2HFY17 onwards on the back of the ramping-up of new hospitals, particularly GHK. GHK’s start-up cost is expected to narrow as revenue intensity increases, arising from the acceptance of more complex cases.

• Revenue is poised to grow by 25% in FY18, underpinned by a 4-5% increase in bed capacity. The expansion of Pantai Hospital Kuala Lumpur and opening of Gleneagles Chengdu will contribute an additional 470 beds in FY18.

• We estimate EBITDA margin to be ~22% in FY17-FY18 (vs. 23% in FY16). Nonetheless, we expect to see an impressive earnings growth once GHK has achieved breakeven, given its sizeable operations (equivalent to 2 hospitals in Singapore). We believe that GHK will achieve breakeven in 18-24 months.

• Presently, Singapore is the only home market where digital health is available. Patients have the option of having bespoke medicines for their treatments. Eventually, this will be replicated in other home markets and should propel the group’s earnings growth.

• To drive earnings growth in PPL Malaysia and PPL Singapore, the group is focusing on enhancing service excellence and increasing revenue per bed. Management is looking at reducing the length of stay with the use of more sophisticated medical technology, which results in more minimally invasive surgeries. This increases bed turnover and results in higher yield per bed. Currently, average length of stay in Malaysia and Singapore is less than 3 days.

• IHH’s Acibadem in Turkey is operationally strong on constant currency basis, with an average occupancy rate of 70%. Its Altunizade Hospital, which opened in March 2017, has a high occupancy rate of 70% at the expense of the other 2 group hospitals which are located in the same area. The 2 underutilized hospitals will be restructured to focus on general medicine and outpatient services. This would help grow its patient base to optimize capacity, thereby enhancing earnings.

• According to management, the Indian market is a volume game. IHH reiterates its interest in M&A as an expansion means, especially in North India, which has the highest healthcare spend per capita.

• In China, the group’s multi-specialty set-ups at strategic locations are expected to thrive as the current healthcare landscape consists of mainly single-specialty set-ups. The tie-up with Taikang Insurance helps to enhance its footprint in the Chinese market.

• We continue to like IHH for: (1) the strong prospects of the private healthcare sector backed by rising affluence and the aging population; (2) its positioning in the premium segment of the private healthcare sector, translating to high margins; and (3) its global presence with a geographically well-diversified portfolio of hospitals. Nonetheless, we believe the current share price has very much priced in IHH’s fundamentals.

Source: AmInvest Research - 13 Sept 2017