Results

1Q14 turnover of RM1.76bn was translated into core net profit of RM172.1m, accounting for 25% of HLIB’s full year forecast, but shy of consensus estimates by 12%, if annualized.

Deviations

Within expectations.

Dividend

None (1Q13: none).

Highlights

Inpatient admission volume: grew healthily yoy in all three key markets, with SG, MY and Turkey gained 6.4%, 9.3% and 5.9%, respectively. However, volume was mixed sequentially, where Turkey was the only one experienced growth with 8.2% qoq due to winter season, followed by SG with flat qoq growth while MY was lower by 3.7% mainly due to Chinese New Year and lesser days in the quarter.

Average revenue per inpatient admission: intensity strengthened in all 3 home markets with SG, MY and Turkey by 7.6% and 8.5% and 8.2%, respectively. Sequentially, both SG and MY’s intensity expanded by 7.6% and 8.5%, respectively due to more complex cases, effectively cushion the lackluster volume growth. Vis-à-vis, Turkey’s intensity fell by 4.0% qoq.

IHH is confident that emerging markets will continue to enjoy higher growth in demand for quality private healthcare driven by (1) demographics of home markets; (2) faster growing upper and middle class; and (3) increased medical travelers from non-traditional markets to medical hubs.

Top line growth will be sustained by opening new facilities and increase capacity to support increasing demand.

Challenges include inflationary impact on staff costs, rentals and other operating expenses and start-up costs of newly commissioned hospitals. IHH plans to mitigate them by increasing mix of higher revenue intensity cases, price adjustments and improve operating leverage, especially from improved margins of the 3 new hospitals opened in 2012.

Currently, Novena’s EBITDA margin matches the blended 22% of all 3 SG hospitals despite only having 70+ beds in operation. IHH is confident to improve the margin further by elevating average daily occupancy to >100 beds by adding another 40 beds given the upfront sunk costs (back office). Ideally, IHH hope to achieve 40% EBITDA margin in Novena when it is fully expanded to its planned capacity of 333 beds.

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: RM3.72

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

Downgrade to SELL from HOLD with unchanged SOPderived TP of RM3.72 (see Figure #3) as share price has run ahead of fundamentals.

Source:Hong Leong Investment Bank Research - 30 May 2014