Results

• IHH Healthcare’s 9MFY15 turnover of RM6.2bn was translated into core net profit of RM685.1m. This came in within ours and consensus estimates, constituting 76% of HLIB’s full year forecast and 72% of streets’ estimates.

Deviations

• None.

Dividend

• None.

Highlights

• Average revenue per inpatient admission: charted positive growth in all three home markets, SG: 3%; MY: 9.6%; Turkey: 20.2%. The higher average revenue was attributed to higher complex cases undertaken and price increases to mitigate cost inflation in each home market.

• Inpatient admission volume: increased marginally by 0.7% in SG. Meanwhile, both MY and Turkey registered a drop of 0.2% (due to slower consumer spending and GST) and 4.7% (seasonally weaker – long holiday period), respectively.

• IMU Health: For its education segment, despite revenue increasing 4% yoy, EBITDA declined 6% mainly on the back of higher A&P expenses, repair and maintenance fee as well as staff cost to maintain the ideal staff to student ratio.

• Parkway Pantai: EBITDA grew 16% to RM952.8m. Its stellar performance was contributed by Mount Elizabeth Novena among others. Operating leverage can be seen clearly by the 67% increase in EBITDA. We believe PPL Malaysia would still experience a slowdown in the next quarter due to GST implementation and inflationary cost pressures.

• Acibadem: Thanks to higher contribution from Acibadem Atakent Hospital, revenue was higher by 11% to RM2139.7m.

• Constructions of hospitals are on schedule while the expansion of capacity from new facilities is expected to draw higher inpatient admissions and drive revenue growth.

• Some challenges faced for the group would be higher staff costs and start-up costs of newly commissioned hospitals. Nevertheless, the increased mix of higher revenue intensity cases should be able to mitigate the impact.

• Overall, we expect IHH bottomline to grow between 22% and 25%. Earnings will be driven by growth in revenue intensity as well as addition of new beds which will capture the increasing demand for premium healthcare service.

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

• Increase FY15-FY17 earnings by 1.4% to 2.2% as we revise our currency assumptions and expect better earnings prospect for the group.

Rating

HOLD  TP: RM6.34

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

• Upgrade to HOLD with higher SOP-derived TP of RM6.34 (see Figure #6). We roll forward our valuation to FY17 and ascribe higher EV/EBITDA multiples in line with industry trend.

Source: Hong Leong Investment Bank Research - 27 Nov 2015