Results

• Below – 1H17 revenue of RM5.45bn translated into core earnings of RM288m, making up 27.5% of HLIB and 30.3% of consensus expectations. In deriving our core earnings, we have adjusted for EIs amounting to a net sum of RM498.6m.

Highlights

• YTD: Revenue grew 10.3% yoy to RM5.5bn attributed to organic growth of existing operations, contributions from hospitals opened in 2017 and the Bulgarian acquisitions in 2016. EBITDA decreased 6% to RM1.1bn due to an overall higher cost structure associated with its expansion drive. Core PATAMI declined by 32.4% to RM288m due to higher D&A and finance costs.
• Yoy: Revenue grew 12% yoy to RM2.8bn on the back of contributions from new hospitals and organic growth of existing operations across all home markets on the back of healthy inpatient numbers and better case mix. EBITDA decreased 3.4% to RM535.8m due to higher operating and staff costs, as well as startup costs associated with the GHK. Core PATAMI declined by 54% due to incremental D&A expenses on completion of new hospitals.
• Qoq: Revenue grew 3% whilst core earnings dipped 57.3% on higher operating and startup costs.
• Inpatient admission: Volume growth across all 4 home markets – SG, MY, IND and TRY, grew 1.3%, 4.8%, 15.2% and 40.4% yoy, driven by demand from local and foreign patients.
• Revenue per inpatient: Charted growth in SG, MY, IND and TRY of 10.9%, 10.3%, 11.7% and 4.0%. The expansion is principally driven by organic growth and better case mixes.
• Losses from GHK have narrowed qoq, due to the faster ramp up. To note, HK revenue per inpatient c.RM28k is almost on par with Singapore. We still expect more lumpy costs and to be incurred as the radiology and oncology divisions come online in 2HF17 for GHK.
• On India, recent talent acquisition drive for its Global franchise and a new wing recently completed in Bangalore is expected to ramp up revenues in the mid-term. Management continues to explore opportunities in India as the group plan to expand its presence in its third home market.
• In the near term, we expect cost pressures arising from wage inflation and competition for talent, higher purchasing costs and higher pre-operating and startup costs of new operations to erode profitability.

Risks

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

Forecasts

• We revise our FY17-19 forecast downwards by 39%-5% as we account for higher finance costs, operating expenses and startup costs.

Rating

• 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

• Post earnings revision, our SOP-derived TP is lowered to RM6.07 from RM6.24. We adopt a higher FY18 EBITDA multiple of 23x (from 21x), a premium to its Asian peers to reflect its greater geographic foot print and growing presence in the India and China market.

Source: Hong Leong Investment Bank Research - 24 Aug 2017