-  We reaffirm our HOLD on IHH Healthcare, with a higher fair value of RM4.30/share (vs. RM3.60/share previously), based on a sum-of-parts valuation, as we roll-forward our base year to FY15F and an earnings revision.

-  IHH recorded 2QFY14 core earnings of RM192mil, bringing the 1HFY14 total to RM364mil. Stripping off the exceptional items, the results are within expectations, accounting for 52% of our full-year estimate of RM704mil and 48% of consensus estimates.

-  IHH’s underlying operational performance grew on the back of higher:- (1) inpatient admissions YoY: Singapore (+11.5%), Malaysia (+13%) and Acibadem (+8%); and (2) average revenue per inpatient admission YoY: Singapore (+0.7%) and Malaysia (+8.6%) due to increase in prices and complex cases. Acibadem, on the hand, declined by -1.9%.

-  The opening of Acibadem Atakent Hospital and Pantai  Manjung Hospital in January and May this year, respectively, contributed to its stronger revenue growth.

-  Despite the start-up losses of new hospitals, IHH saw EBITDA margin improvements in all its operating markets, to 23.6% from 22.5% in 2QFY13, due to a better operating leverage and the continuous ramp-up of its younger hospitals (Mount Elizabeth Novena, Acibadem Ankara and Acibadem Bodrum).

-  Notably, Mount Elizabeth Novena Hospital’s revenue grew by a remarkable 87% YoY to RM81mil and EBITDA to RM18mil, ~7x 2QFY13’s RM2.6mil. The improvement was underpinned by a steady increase in inpatient volume, the newly-opened Obstetrics discipline and an increase in the number of doctors.

-  As such, we have tweaked our earnings by +8%-20% given the improved operational efficiency and more importantly, the new Oncology discipline at Mount Elizabeth Novena which will start this year. We now project FY14F earnings at RM755mil, which will expand to RM937mil in FY15F.

-  The expansion front remains solid over the next few years: Malaysia (+860 beds), Acibadem (+1,061 beds), and International (+1,076 beds)

-  Balance sheet remains healthy with net gearing of 0.1x as at end-2QFY14.

-  While we like IHH’s positive prospects and slick execution, valuations are lofty, trading at 53x FY14F PE at the current level

Source: AmeSecurities