- We reaffirm our HOLD recommendation on IHH Healthcare with an unchanged fair value of RM3.60/share, based on a sum-of-parts valuation.

- IHH’s 1QFY14 core earnings (ex-EIs) are within expectations as core earnings made up 24% of our FY14 full-year forecast and 23% of consensus despite the seasonally weak 1Q due to the Chinese New Year period.

- IHH’s core net profit of RM172mil rose 30% YoY, driven by inpatient admissions and revenue intensity across its key markets, which was further boosted by the opening of the Acibadem Atakent Hospital in January 2014.

- Interestingly, inpatient admission in Malaysia rose by a significant 9% YoY – largely driven by the domestic market and Indonesia (Sumatra). Singapore saw a growing number of foreign patients from new markets, i.e. Middle East and China.

- The underlying improved EBITDA were driven by the organic growth of existing hospitals and better operating leverage from the ramping up of new hospital opened in 2012. Mount Elizabeth Novena, Acibadem Ankara and Acibadem Bodrum incurred significant start-up costs in 1Q last year.

- EBITDA margin was 25% in 1Q. We learned that the EBITDA margin was weakened by the Turkish Lira, which depreciated by 13.5% YoY against the Ringgit. This was partly negated by the strong Singapore Dollar.

- The ramp-up of Mount Elizabeth Novena is progressing well, with 147 operating beds (out of 330 beds) and an average occupancy of 60%. IHH plans to add another 40 beds by year-end. Surprisingly, Mount Elizabeth Novena’s EBITDA margin is 22%, which is similar to the average EBITDA margin of its three matured hospital in Singapore. Its margin is expected to improve moving forward due to better operational efficiency and higher revenue per inpatient.

- Ongoing hospital projects are well on track. Pantai Hospital Manjung has just opened in May. IHH highlighted that medical suites at Gleneagles Medini will be launched in 2H1Y14. By FY15, the group is envisaged to add a total of 1,861 beds in Malaysia (800 beds) and Turkey (1,061 beds).

- It has a healthy balance sheet with a net gearing of 11% and a cash pile of RM2.3bil, as at end-1QFY14.

- Valuation wise, the stock is trading at 48x forward PE and is relatively expensive compared to its regional peers’ 28x.

Source: AmeSecurities