- We reaffirm our HOLD recommendation on IHH Healthcare Bhd, with an unchanged fair value of RM3.80/share, based on our derived sum-of-parts valuation.

- IHH posted a solid normalised net profit (ex-EIs) of RM189mil for 2QFY13 that brought 1HFY13’s normalised earnings to RM322mil. Earnings for the first six months are deemed to be in line with our full year estimate of RM500mil, accounting for 64% and 47% of consensus’.

- For comparable purposes (stripping off the one-off EIs and recognition of the sales of medical suites in FY12), earnings surged by 39% YoY, on the back of a 21% increase in revenue, buoyed by the ramp up of new hospitals and six months consolidation of Acibadem (vs. 5 months YoY).

- Earnings are set to further accentuate and ride on Mount Elizabeth Novena and Acibadem Ankara, which have just breakeven at EBITDA level. Narrowing EBITDA losses at Acibadem Bodrum continues and is envisaged to turn positive in the coming 3Q. Note that these hospitals were only opened last year.

- The inpatient admission volumes and average revenue per inpatient admission (ARP) are on a rising trend, supportive of IHH’s strong franchise value. Despite a marginal drop (-1%) in admission volumes at Acibadem due to summer season, ARP rose 7% QoQ helped by more complex cases.

- Moving forward, 3Q may see some dip given the seasonal weakness due to:- (1) Hari Raya in Singapore and Malaysia coupled with the Chinese Ghost Festival ; and (2) Summer in Turkey that runs throughout June to September.

- The key potential downside to our earnings is the currency risk involving the relative strength of SGD against Rupiah for IHH’s Singapore medical tourism arm. Indonesian accounts for the largest volume of c.50% of the foreign patients in Singapore to IHH.

- A shift away from Singapore (particularly for less complex cases) is already happening with marginal mid-single digit drop in medical tourism in 1HFY13 and this would continue into the 3Q at a similar level. Having said that, this would be partly mitigated by complex/acute cases which foreign travellers could only seek treatment in Singapore and the growing domestic pool.

- Taking all things into perspective, we maintain our EPS forecast. Healthy pipeline of new hospitals and expansion (+>3,575 over the next three years) are well intact.

- On the flipside, management highlighted that a dividend policy will be announced in the 4Q.

Source: AmeSecurities