1Q18 core profits grew strongly by 16.9% yoy to RM319m on healthy organic growth at existing hospitals while the newly-opened hospitals – Gleneagles Hong Kong (GHK) and Acibadem Altunizade – continued to benefit from continuous ramping up of its capacity. EBITDA margin was stable at 21.7% and was broadly inline with our estimates at 23%. However, lower-than-expected interest expense and effective tax rate resulted in core earnings coming in ahead of our estimates at 33% and 26% respectively.
Group revenue eased 1% qoq mainly on weaker contribution from the Turkey and Singapore operations amidst the weak Turkish Lira and Singapore Dollar against ringgit. Revenue intensity for the respective operations eased 9% and 1% respectively albeit demand remains healthy. However, gain from qoq decline in interest expense was able to offset the revenue weakness and higher minority interest charge off which led to 2.5% core earnings growth.
Overall, the 1Q18 performance signals an encouraging recovery (as seen with the revenue growth and inpatient admissions as well as the narrowing losses at GHK) even if part of the core earnings growth was boosted by the lower effective tax rate (after adjusting for the Apollo disposal gain in 1Q17 and other exceptional items). The transitioning government coupled with rising US T-bill and easier crude prices off late could see ringgit weakening, benefiting IHH.
We keep our FY18F earnings unchanged for now and retain our HOLD call on the stock with an unchanged TP of RM6.10. This is arrived based on 53x PE pegged to FY18 EPS. We believe there is potential upside to IHH’s earnings arising from organic growth at existing and new hospitals as well as from further weakening of the ringgit.
Source: BIMB Securities Research - 28 May 2018
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