Results

• 1HFY15 turnover of RM4.1bn was translated into core net profit of RM461.9m. Its core net profit came above our expectations, but in line with consensus, accounting for 56% of HLIB’s full year forecast and 49% of consensus estimates.

Deviations

• Due to forex exchange losses on net borrowings.

Dividend

• None (2Q14: none)

Highlights

• Inpatient admission volume: grew 5.5% yoy in SG contributed by higher growth in its foreign patients. However, both MY and Turkey charted marginally lower inpatient admission volume, -0.5% and -1.1% yoy, respectively. Qoq, both SG and MY increased 6.6% and 5.6%, respectively due to seasonally stronger quarter for both key markets. Turkey on the other hand, suffered 2.9% declined.

• Average revenue per inpatient admission: grew healthily in all three home markets, with SG, MY and Turkey gaining 4.9%, 14.9% and 24.3% yoy, respectively. Higher average revenue was due to higher complex cases and price increase which also mitigated cost inflation in all three markets.

• 2QFY15 results inclusive of contribution from Continental Hospitals Limited, where acquisition was completed on 23rd March 2015. Expected capex for 3QFY15 until 2017 would be RM3.8bn.

• With the current economic slowdown, despite the weakening of Turkish Lira of approximately 20% against USD, it still appreciated against MYR. Also, coupled with stronger SGD the group should benefit from the currency exchange.

• Topline growth 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.

• Challenges include higher staff costs, other operating expense as well as 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 potential headwinds 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

• We tweak earnings higher by 7% to reflect results deviation and also taken into account higher capex and better prospect for the company.

Rating

SELL , TP: RM4.51

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 with slightly higher SOP-derived TP of RM4.51 (see Figure #6) as share price has run ahead of fundamentals.

Source: Hong Leong Investment Bank Research - 27 Aug 2015