Results

1H13 core net profit of RM322.2m (+38.8% yoy) came below expectations, accounting for 46% and 47% of HLIB and consensus full year forecast respectively.

2Q12 and 1H12 results included one-off recognition of the sale of medical suites, which contributed revenue of RM1.2bn, EBITDA of RM238.3m and PAT of 193.6m.

Lower 2Q13 effective tax rate due to recognition of one-off tax credit of RM22.0m.

Deviations

Weaker-than-expected top line attributable to lower than expected average revenue per inpatient admission (ARPIA).

Dividend

None. However, management informed that the Board intends to introduce a dividend policy by 4Q13.

Highlights

Inpatient admission volume: Both PPL Singapore and Malaysia saw healthy growth of 3.3% and 4.9% qoq respectively. However, Acibadem experienced marginal contraction by 1.3% chiefly due to summer (less medical case) and holiday seasons.

As for ARPIA, all three home markets were in expansion modes with Singapore, Malaysia and Acibadem by 0.2%, 1.0% and 6.9% respectively.

Constructions of hospital are on schedule as newly expanded capacities are expected to draw higher inpatient admissions and subsequently drive revenue growth. However, depreciation and finance costs associated with new operations may affect profitability in the startup phase.

IHH also warned that inflation may lead to increase in staff costs, rentals and other operating expenses, thus putting pressure on EBITDA going forward.

The appreciation of SGD may prohibit medical travelers to visit Singapore. Currently, medical tourism revenue makes up 40% of PPL Singapore’s revenue with majority from Indonesia. However, IHH is not overly concern and believe that the shortfall (expecting single-digit contraction) may be offset by higher domestic demand due to ageing population.

Due to seasonality (Ramadhan and Hungry Ghost festivals), IHH expects that 3Q13 will be sequentially weaker.

Catalysts

Global population growth, ageing demographics, more affluent community, proliferation of medical tourism, overwhelming healthcare demand.

Risks

Regulatory risks, competitive risks, FOREX risks, increase in staff cost and unable to unlock the synergies of the enlarged entity.

Forecasts

Updated model based on latest trend and operational data along with the deviations mentioned above. Hence, FY13-15 EPS were revised downward by 9.2%, 4.9% and 2.7% respectively.

Rating

SELL, TP: RM3.29

Positives – strong brand name, booming of medical tourism, high demand in quality healthcare services, continuous expansions and complemented by education arm.

Negatives – high staff cost and retention of reputational medical practitioners.

Valuation

Maintain SELL call after reducing our SOP-derived fair value by 6.8% from RM3.53 to RM3.29 (see Figure #4) post earnings cut as valuation is ahead of fundamentals

Source: Hong Leong Investment Bank Research - 28 Aug 2013