Results

• Below – 1Q17 revenue of RM2.7bn translated into core earnings of RM201.8m, making up 18.4% of HLIB and 18.8% of consensus expectations, respectively. In deriving our core earnings, we have adjusted for EIs amounting to a net sum of RM313.4m.

Highlights

• Yoy: Revenue grew 8.5% yoy on the back of the consolidation of newly acquired entities (Bulgaria), the ramping up of operations of hospitals opened in 2015 (Medini, Kota Kinabalu, Taksim) and organic growth of existing operations. EBITDA decreased 8.3% due to higher operating and staff costs, as well as pre-operating and startup costs associated with the opening of Gleneagles HK and Acibadem Altunizade. Core PATAMI declined by 15% on incremental D&A expenses on completion of the said hospitals.
• Qoq: Revenue grew 2% whilst core earnings dipped 9.3% on higher operating and startup costs.
• In 1Q17 inpatient admission volumes saw growth across all 4 home markets – SG, MY, IND and TRY, expanding by 4.1%, 3.1%, 14.1% and 33.8% yoy, driven by demand from local and foreign patients.
• In 1Q17 average revenue per inpatient admissions charted growth in SG, MY, and IND of 10.5%, 10.8%, 14.1% yoy; whilst TRY has narrowed its decline to -9.2% yoy (+5.4% qoq). The expansion is principally driven by organic growth and better case mixes.
• Singapore saw an increase in the arrival of medical tourists (+ve Phillipines,-ve Bangladesh) as well as local patient on bread and butter cases and complex cases.
• HK is being slowly rolled out, with more than 50 all inclusive fixed price packages tailored to meet the needs of patients at the initial opening phase. We can expect more lumpy costs and expenses to be incurred as the radiology and oncology divisions come online in 2HF17. We are of the expectation that GHK would still be loss making in FY17.
• On Altunizade, of the 200 operational beds (350 licensed), 70% already operational due to pent up demand for complex procedures from neighboring Acibadem Kadikoy.

Risks

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

Forecasts

• We adjust our forecast to account for the higher Depreciation and Amortization expenses on the back of the opening of GHK and Acibadem Altunizade. Our FY17/18/19 EPS is revised by -5%/-17%-23%. We adjust our SGDMYR forecast higher and our TRYMYR assumption lower.

Rating

HOLD ↔ TP: RM6.24 ↑

• 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

• We raise our SOP-derived TP to RM6.24 from RM6.21 as we impute earnings revision and roll over our valuations into FY18. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 22 May 2017