• 1Q19 EBITDA grew 8% qoq to RM815m mainly due to contribution from Fortis of RM76.6m at EBITDA level.

• YoY EBITDA rose 31% on higher revenue and better operating leverage achieved. Overall, EBITDA was in-line with ours/consensus estimates at 28%/27% respectively but profits trailed 11%/10%.

• Near term outlook remains challenging on concerns over the Acibadem US$ debt restructuring while the Fortis rejuvenation process and development of greenfield hospitals poses inherent risks.

• Our TP and recommendation are currently under review.

QoQ performance mainly driven by Fortis

Group revenue and EBITDA rose to RM3.6bn (+15% qoq) and RM815m (+8% qoq) respectively. The growth was mainly driven by full quarter contribution from Fortis (revenue: RM674.7m, EBITDA: RM76.6m) as compared to only 1-month contribution in 4Q18 (revenue: RM217.1m, EBITDA: 13.5m). Overall, total inpatient admissions and average revenue intensity rose 25% and 0.3% qoq respectively (Table 2). Despite this, core net profit fell 81.8% qoq due to higher effective tax rate.

Strong operational performance on YoY

1Q19 revenue grew 27.6% yoy on healthy organic growth at its existing operations, ramp up of new hospitals (GHK & Altunizade) as well as additional revenue of RM682.2m (+23%) from new acquisitions (ie. Amanjaya and Fortis). Consequently, EBITDA grew 31% with slight margin expandsion by 0.7ppts yoy to 22.4% on the back of better operating leverage achieved. Overall, EBITDA was in-line with ours/consensus estimates at 28%/27% respectively but profits trailed 11%/10% due to higher net financing costs and tax expenses. Higher effective tax rate mainly due to non-taxable income and deductible expenses as well as unrecognised tax losses of Gleneagles Hong Kong Hospital.

Challenging near term outlook remain

IHH near term prospect remains challenging on concerns over pertinent issues which among others include the restructuring of Acibadem’s remaining US$420m debt has yet to be finalized with the risk of incurring higher interest charges upon conversion. On top of that, Fortis consolidation and rejuvenation process together with development of greenfield hospitals e.g. in China may also lead to higher execution cost. Additionally, all of these projects have the potential to push back the time frame for IHH to recover its investments, in our view. As such, we believe inherent risks exist in the near term and investors should exercise caution on the stock until earnings clarity improves.

Maintain forecast pending review

Our earnings, TP and recommendation are currently under review as we relook to revamp our valuation and view on the stock.

Source: BIMB Securities Research - 31 May 2019