- We re-affirm our HOLD recommendation on IHH Healthcare Bhd with an unchanged fair value of RM3.25/share, based on a sum-of-parts valuation. Our fair value is currently underreview, pending a company visit, as the share price has way surpassed our fair value.

- Stripping off exceptional items, IHH posted a 1QFY13 core earnings of RM134mil (+17% YoY), which is within expectations – making up for 25% of our and 19% of consensus full-year forecasts.

- Due to the adoption of new accounting standard, PLife REIT is consolidated as an subsidiary, while Khubchandani Hospital is equity accounted (50% interest), effective 1 January 2013.

- The solid underlying earnings growth is mainly attributed to the organic growth of existing hospital operations, full 3 months reflection of Acibadem and ramp up in new hospitals.

- More importantly, EBITDA losses narrowed significantly to c.RM3mil from RM16mil, at Mount Elizabeth Novena Hospital as a result of streamlining of management and cost structures with Mount Elizabeth Orchard. With Mount Elizabeth Novena anticipated to EBITDA breakeven this year and standing at c.35% occupancy, this should further catalyse the stock. The planned ramp up of full capacity of 330 beds is likely to only materialise next year.

- Excellent branding of IHH continued to uphold, witness by steady growth of inpatient volumes. Despite ramp up in Acibadem’s inpatient volumes, EBITDA is impacted by the initial start-up costs of Bodrum and Anakara Hospitals. Nonetheless, Acibadem’s EBITDA should expand in coming quarters given better operational efficiency.

- A new growth frontier for the group would be Hong Kong, marking its foray via the winning of the Hong Kong sites for a greenfield project. This acts as a platform to penetrate deeper into the large and underserved market of Hong Kong. Operations are scheduled for commencement only in FY16F. As such, no earnings inclusion into our projections.

- We expect IHH’s continued efforts to intensify revenue and exposure in its three key markets to propel growth further, underpinned by a strong franchise value. The group remains on a constant lookout for expansion opportunity into other international markets, with particular interest for China and India.

- For exposure to the healthcare universe, we prefer KPJ Healthcare (BUY, RM8.00/share) for valuation considerations. IHH’s PE multiple of 55x FY13F is at 71% premium to peers’ average of 32x, with no yield support as compared to KPJ (>2%).

Source: AmeSecurities