• IHH Healthcare (IHH) 1Q17 core earnings rebounded 33% qoq to RM209m but fell 16% yoy due to large swings in its interest expense resulting from forex losses.
• At the EBITDA level, earnings were flat yoy and declined 5% qoq to an estimated RM619m in 1Q17.

• Core earnings were 22% of our estimates which we deem as being in line ahead of earnings respite in coming quarters due to seasonality factors.

• Maintain HOLD with an unchanged RM6.10 TP. While IHH offers good long-term potential, we see near term earnings risks from expansion plans into new markets are inherent.

Possible earnings respite ahead

IHH’s 1Q17 core earnings rebounded 33% qoq but fell 16% yoy to RM209m which is 22% and 20% of ours and consensus estimates respectively. The qoq rebound was mainly on lower interest cost which was inflated by forex losses. Meanwhile, yoy core earnings fell on start-up costs from newly-opened hospitals. On headline basis, earnings doubled to RM470m as IHH pared down its stake in Apollo Hospitals to 4.8%, netting a gain of RM313m.

Core earnings fell on yoy basis…

Revenue grew 8% yoy boosted by newly-acquired assets, higher inpatient admissions and revenue intensity. However, these gains were more than offset by higher depreciation charge, arising from the completion of Gleneagles Hong Kong and Acibadem Altunizade. At the EBITDA level, earnings were flat as margins fell 1.8ppts to 23.1% but the higher forex losses inflating the interest costs had weighed on earnings which declined 16% yoy.

…but surged on qoq basis

Group revenue grew 2% qoq as Acibadem’s revenue contribution declined 5% qoq due to weak Turkish Lira (on constant currency basis, Acibadem’s revenue would have grown 6% qoq). The weak revenue was exacerbated by higher start-up costs from newly opened hospitals; EBITDA fell 5% qoq while margin contracted by 1.7ppts from 24.8% in 4Q16. However, core earnings surged on lower interest expense and minority interest charge off in 1Q17.

No change to earnings

We kept our FY17 earnings unchanged. While earnings appear short of expectations, we seasonal pick up in earnings which would be partially offset by start-up costs from new hospitals.

Maintain HOLD

Maintain HOLD with an unchanged TP of RM6.10 based on 53x PE pegged to FY17 EPS. We believe current price levels have fairly reflected near term earnings risks from its new ventures.

Source: BIMB Securities Research - 22 May 2017