• IHH Healthcare (IHH) saw another weak results on higher operating costs and start-up expenses from new hospitals. We estimate 3Q17 core earnings fell 34% yoy but rebounded 53% qoq to RM243m.

• Overall, we estimate 9M17 core earnings declined -22% to RM675m and to be largely inline with our forecasts at 72% but ahead of consensus at 84%. No changes to our forecasts.

• HOLD with an unchanged RM6.10 TP. We continue to like IHH’s long-term growth prospects albeit this also comes with growing pains. Buy on dips.

Growing pains are still felt but…

IHH’s 9M17/3Q17 core earnings fell 34% yoy due to the start-up costs from the opening of two new major hospitals in Mar 2017 which also led to higher depreciation, amortisation and finance costs. Higher operating expense and staff costs at the existing hospitals also weighed down on earnings. Overall, the 9M17 core earnings were largely inline with our estimates at 72% but ahead of consensus at 84%.

…sequential recovery is positive

On the flipside, earnings rebounded sequentially by 53% despite the third quarter (3Q) being seasonally weak. The improvement at the EBITDA level was mostly on the back of lower losses at Gleneagles Hong Kong (GHK), in tandem, with the ramping up of operations. Management noted that Acibadem Altunizade also saw strong ramping up as it leverages on the two spoke hospitals in the vicinity. In addition, core earnings were also underpinned by lower interest expense (on qoq basis). The latter was inflated in 2Q17 after IHH accrued interest for capital gains tax payable.

Volume trends and seasonal factors

The inpatient admissions in Malaysia and Turkey declined qoq albeit Singapore’s remained healthy. Management points that Singapore’s volume growth were propped up by medical tourists from North Asia and India as local volume was lower due to the Hungry Ghost Festival. Turkey’s inpatient volume also tends to be weak over summer.

Stronger quarters ahead

Overall, we expect stronger quarters ahead as capacity at new hospitals are ramped up. For 4Q, earnings tend to be seasonally stronger too.

Maintain HOLD

Maintain HOLD with RM6.10 TP (based on 53x FY17 EPS). We believe more earnings risks are in store as it pursues its growth ambitions. However, this is balanced out by its solid long-term earnings outlook. Accumulate on dips.

Source: BIMB Securities Research - 28 Nov 2017