Results

9M13 core net profit of RM460.5m (+45.3% yoy) was in line with our expectations, accounting for 72% of HLIB but shy of street’s forecast by 6.7% if annualized.

9M12 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

Within expectations.

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 were relatively flat with +1.0% and -2.3% respectively due to seasonality (Ramadhan and Hungry Ghost festivals). Acibadem also saw contraction of 7.3% chiefly due to summer months (less medical cases).

Average revenue per inpatient admission: all three home markets were in expansion modes with Singapore, Malaysia and Acibadem increased by 1.0%, 3.2% and 1.0% respectively. For PPL, this was mainly driven by more complex cases due to the availability of more sophisticated facilities and equipment while Acibadem adjusted pricing to counter Turkey’s exorbitant inflation rate of 7-8%.

3Q13 EBITDA increased by 30% yoy as 3 new hospitals (Mt. E. Novena, Acibadem Ankara and Acibadem Bodrum) which commenced operation in FY12 turned EBITDA positive.

Constructions of hospital are on schedule while newly expanded capacities are expected to draw higher inpatient admissions and subsequently drive revenue growth.

The concern of SGD appreciation impacting medical tourism did not materialize in 3Q13, but increased 9% qoq instead. IHH shared that medical tourists spiked up in the beginning of 4Q13 due to seasonality.

IHH expects higher salaries and wages to attract and retain staff as well as higher rental and operating costs under inflationary pressure. All these will eventually put pressure on EBITDA going forward.

Catalysts

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

Risks

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

Forecasts

Unchanged.

Rating

SELL, TP: RM3.29

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

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

Valuation

Maintain SELL call with unchanged SOP-derived fair value of RM3.29 (see Figure #4) as we believe current valuations are ahead of fundamentals.

Source: Hong Leong Investment Bank Research - 27 Nov 2013