- We reaffirm our HOLD recommendation on IHH Healthcare, with an unchanged fair value of RM4.30/share based on a sum-of-parts valuation.

- 9MFY14 core earnings of RM541mil were within expectations – accounting for 72% and 70% of our and consensus full-year estimates given that 3Q is a seasonally weak quarter.

- IHH’s solid performance YoY continues to be driven by:-

(1) Higher inpatient volumes: Singapore (+12%), Malaysia (+10%) and Acibadem (+11%); and

(2) Higher revenue intensity: Singapore (+3%), Malaysia (+8%) and Acibadem (+2%).

- In addition to more complex cases, the price adjustments in Singapore and Malaysia had contributed to the stronger average revenue per inpatient admission.

- EBITDA margins improved by 0.7ppts despite the start-up losses arising from new hospitals opening and higher staff cost (+13% YoY) underpinned by operating leverage, ramp-up of operational efficiency and savings on consumables.

- More importantly, Mount Elizabeth Novena saw significant revenue growth of 72% YoY and EBITDA growth of >100% YoY boosted by operational efficiency. We expect the stronger ramp-up moving forward to drive revenue and the progressive opening of additional wards.

- Despite the softening of medical tourism from Indonesia seeking healthcare in Singapore, IHH saw increased foreign patients from other markets such as Middle East and Myanmar. Typically, Indonesia patients constitute about 40%-50% of Singapore’s medical tourism revenue. The bulk of Singapore’s revenue (60%) is anchored by the domestic market.

- The stronger appreciation of SGD continued to offset the weakening Lira. Acibadem’s exposure in USD continues to be hedge through medical tourism receipts in USD and substantial USD cash buffer.

- Balance sheet remained strong with net gearing at 0.1x and cash pile of RM2bil as at 9MFY14.

- While we like IHH’s expansion front, slick execution and positive prospects riding on the rising healthcare demand, valuation is expensive, trading at forward PE of 43x, at a premium to its peers.

Source: AmeSecurities