• IHH’s recovery momentum reversed in 2Q18; core profits fell 9% qoq on weaker revenues. Still, it rose 82% yoy but off a low base in 2Q17.

• EBITDA was weak as we estimate it eased 11% qoq and 2% yoy in 2Q18 while 1H18 rose only 2% as 2Q18 revenues were impacted by unfavourable exchange rate.

• While core profits were ahead of ours and consensus estimates at 62% and 69% respectively, EBITDA trailed at 43% and 44%. The distortion arose from lower effective tax rate and MI charge off.

• We believe 2H18 could be weaker amidst dilution in Turkish Lira and seasonal factors albeit long term prospects remain largely intact. Maintain HOLD with RM6.10 TP. Accumulate on weakness.

A tough quarter

2Q18 core profits fell 8.8% qoq to RM289m as earnings were impacted by weaker revenues following the stronger ringgit. At the EBITDA level, we estimate earnings fell 14.7% and margin eroded by 1.1ppts qoq to 20.6%, exacerbated by weak performance at Malaysia and Acibadem; the former saw higher staff costs amidst bonus provisions while the latter was impacted by higher opex arising from consumables and services rendered in dollar and euro.

Low base effect overhauled yoy performance

Over the yoy period, 2Q18 and 1H18 core profits were up 82% and 40% respectively. These were largely due to the low base effect in 2Q17 as well as lower interest expense and MI charge off. At the EBITDA level, 2Q18 posted a 1.5% decline while 1H18 only rose by 2.4%. The weak performance was attributed to weaker revenues in 2Q18, due to the stronger ringgit.

Expecting a weaker 2H18

Against expectations, 1H18 EBITDA trailed ours and consensus estimate at 42% and 44% respectively but core profits were ahead at 62% and 69%. The distortion is largely due to lower effective tax rate and MI charge off. Operationally, we expect 2H18 to come in weaker on the back of several factors: i) the crash in Turkish Lira diluting Acibadem’s strong performance and pushing up service costs rendered in dollar and euro; and ii) seasonal factors (ie. Hungry Ghost Festival) impacting the Singapore and possibly, North Asia operations.

Maintain HOLD

Our FY18F earnings are kept unchanged for now while we retain our HOLD call on IHH with an unchanged RM6.10 TP. We believe near term earnings risks are inherent due to currency fluctuations but long term prospect could be promising amidst increasing exposure in emerging markets. Accumulate on weakness.

Source: BIMB Securities Research - 28 Aug 2018