Results

• Below Expectations – FY16 revenue of RM10.0bn translated into core earnings of RM866.0m, making up 90.0% of HLIB and 91.0% of consensus expectations, respectively. In deriving our core earnings we have adjusted for EIs amounting to a net sum of RM254m.

Dividend

• Declared a dividend of 3 sen/ share for FY16 yielding 0.5%.

Highlights

• Yoy: Revenue grew 15% yoy whilst EBITDA decreased 8% as the group recognized higher doubtful expenses of RM49.0m vs RM9.9m SPLY. Core PATAMI grew 4% on higher FX gains and lower MI share of profits.

• Qoq: Whilst revenue grew 15% qoq, the group booked a reported loss of RM42.5m after recognizing EI principally related to VAT settlement in Turkey, impairments on a hospital in India and higher doubtful expenses. Core PATAMI grew 2% due to EBITDA growth offset by higher depreciation.

• YTD: Revenue grew 19% yoy attributed to organic growth of existing operations, ramping up of operations of hospitals opened in 2015 and consolidation of recent acquisitions. EBITDA grew 7% yoy mainly driven by topline growth. Core PATAMI decreased 4% yoy due to increased depreciation from new hospitals and higher finance costs.

• FY16 inpatient admission volume: Growth across all 4 home markets – SG, MY, TRY and IND grew 4.8%, 3.6%, 46.8% and 7.7% yoy driven by demand from local patients.

• FY16 average revenue per inpatient admission: SG, MY and IND charted growth of 3.1%, 12.3% and 26% yoy; whilst TRY saw a decline of -20.0% yoy.

• Singapore saw a decrease in the arrival of medical tourists on bread and butter cases partially offset by rising number of local patients on less complex cases. However the number of medical tourist on complex cases remained stable. Singapore remains the group’s principal earnings driver contributing 62% of core PATAMI.

• In FY17 we can expect the group to continue to expand in markets where demand for quality healthcare is growing and remains robust and its two Greenfield projects to come online .

In the mid-term, China is expected to become the 4 th growth driver for the group. Gearing stands at a comfortable 0.21x and with cash holdings of RM2.4bn as at 31 st December.

Catalysts

• Strategic geographic footprint in key gateway markets. Growing population and an ageing demographics coupled with the rise in affluence in domestic markets will support demand for high quality healthcare.

Risks

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

Forecasts

• We adjust our forecasts to account for the higher pre operating and startup costs incurred as GHK and Acibadem Altunizade is ramped up for opening by 1HF17. Our FY17/18/ EPS is revised by -10%/-7%/.

Rating

• HOLD ↔ TP: RM6.21

• Whilst we like IHH for its exposure to key gateway markets, good management and strong reputation, earnings delivery in the near term will be hampered by higher pre-operational costs as the new hospitals are likely to take time to mature.

Valuation

• After earnings revision our SOP-derived TP is lowered to RM6.21 from RM6.32. Maintain HOLD .

Source: Hong Leong Investment Bank Research - 24 Feb 2017