• IHH Healthcare (IHH) posted a weak set of results, drawing impact from cost inflations and start-up costs from its new hospitals. We estimate that 2Q17 core earnings eased 19% yoy and 39% qoq to RM167m.

• Meanwhile, 1H17 core earnings declined by 10% to RM441m to be broadly in line with our forecasts at 47% but trailed consensus at 43%. No changes made to our forecasts.

• Maintain HOLD with an unchanged RM6.10 TP. We believe IHH offers good long-term growth potential but growing pains are inherent.

Growing pains

IHH’s 1H17/2Q17 core earnings decline was largely due to start up costs incurred from the opening of two new hospitals in Mar 2017. As a result, finance costs had also risen while depreciation kicked-in upon commissioning of these facilities. In the same vein, earnings fell 39% qoq. Against our estimates, IHH’s 1H17 core earnings were broadly in-line at 47% of our FY17E forecasts.

Start-up costs impacts

The two major hospitals opened in 1H17 were Gleneagles Hong Kong (500 beds) and Acibadem Altunizade (325 beds). While the group contended with higher consumable costs, it was also worth noting that start-up cost from increased overheads were sizeable. Staff costs as a proportion of revenue inched up from 37-39% on normalised basis to as high as 41% in 2Q17. Staff costs remain the bulk of operating expense (ie. averaging c.45% of total expense).

Other key highlights

Other key highlights from the conference call session with the management were: i) The three new hospitals in Malaysia – Gleneagles Kota Kinabalu, Pantai Manjung and Gleneagles Medini turned EBITDA positive in 2Q17; ii) Arrival of Indonesian patients in Singapore remains robust, up 15% yoy in 1H17, to balance out declining Middle East patients; and iii) The growth at Singapore operations was by Mount Elizabeth Novena which currently operates c.300 beds. Management expects the remaining 20-30 beds to be opened towards end 2017 (total capacity is 333 beds).

No change to earnings

No changes to our earnings forecasts.

Maintain HOLD

We believe the weak performance is warranted by its growth ambitions which promises good long term growth prospects. Our RM6.10 TP (based on 53x FY17 EPS) remains unchanged and recommend visiting the stock on dips.

Source: BIMB Securities Research - 24 Aug 2017