Results

• 1Q15 sales of RM2.0bn were translated into a core net profit of RM227.8m. This came in above our expectations but in line with consensus, accounting for 29.4% and 24.1% of HLIB and consensus full year estimates, respectively.

Deviations

• Higher-than-expected revenue from growth in patient volume and revenue intensity from existing operations.

Dividend

• None (1Q14: none)

Highlights

• Inpatient admission volume (4Q14): grew yoy in all three key markets, with SG, MY and Turkey gained 7.2%, 0.3% and 2.6%, respectively. Qoq growth was mixed, with SG being the only one recording a flat growth of 0.4%. MY and Turkey both suffered declines. MY was lower by 5.2% due to Chinese New Year as well as lower number of days in the quarter. Despite it being a winter season for Turkey, qoq dropped 1.5%.

• Average revenue per inpatient admission: Yoy, intensity strengthened in all three home markets with SG, MY and Turkey increased by 6.4%, 13.8% and 10.4%, respectively. Both MY and Turkey recorded double digit growth resulting from more complex cases and price increases which compensate the lower admission volume in both countries.

• The group should be able to benefit from the rising demand for high quality private healthcare from emerging markets, driven by: (1) faster growing upper and middle class; (2) demographics of home markets; and (3) higher number of medical travelers from non-traditional markets such as Middle East and China to IHH’s medical hubs.

• As for the 21% acquisition of Continental Hospitals Limited, results will be consolidated from April 2015 onwards.

• IHH is confident that it will enjoy higher growth in 2015. Revenue should be supported by the opening of new facilities in the group’s home markets coupled with higher capacity to sustain the increasing demand for healthcare services.

• The potential headwinds include higher staff costs, other operating expense as well as the start -up costs from newly commissioned hospitals. Management stated that increased prices, better operating leverage as well as better mix from high complexity cases should be able to alleviate the challenges faced.

Catalysts

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

Risks

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

Forecasts

• Increased earnings for FY15-FY17 by 9%-12% as we take into account higher revenue from its home markets.

Rating

SELL , TP: RM4.47

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

• Reiterate SELL despite higher SOP-derived TP of RM4.47 (see Figure #5) as share price has run ahead of fundamentals.

Source: Hong Leong Investment Bank Research - 29 May 2015