Results

• Below – 9M17 revenue of RM8.26bn translated into core earnings of RM413.4m, making up 64.5% of HLIB and 51.7% of consensus expectations. In deriving our core earnings, we have adjusted for EIs amounting to a net sum of RM455.3m.

Deviation

• Higher-than expected overall cost structure.

Highlights

• YTD: Revenue grew 11.7% yoy to RM8.26bn attributed to organic growth of existing operations, contributions from hospitals opened in 2017 and recent acquisitions in 2016. EBITDA decreased 3% to RM1.7bn attributed mainly to the pre-operating and startup costs from GHK. Core PATAMI declined by 35.8% to RM413.4m due to higher D&A and finance costs.
• Yoy: Revenue grew 14.7% yoy to RM2.8bn on the back of contributions from new hospitals and organic growth of existing operations across and continuous ramp up of hospitals opened in 2017. Consequently, EBITDA increased by 3.0% to RM562.4m. Core PATAMI declined by 42% due to incremental D&A expenses on completion of new hospitals and a higher overall cost structure as mentioned above.
• Qoq: Revenue grew 1% whilst core earnings grew 45.4% on lower finance costs and a lower base in 2Q17 which saw the group recognize additional tax provisions relating to FY16.
• Inpatient admission: Volume growth across all 3 home markets – SG, TRY and IND grew 1.1%, 15.7% and 18.4%, driven by demand from local and foreign patients. MY saw a marginal decline on patient traffic by 2.6%.
• Revenue per inpatient: Growth in inpatient revenue across all 4 homes markets attributed to better case mix and increase in foreign patient traffic. (SG +14.8%, MY +8.5%, IND +7.0%, TRY+1.7%).
• GHK continues to ramp up at a healthy level as the hospital continues to take on more complex cases faster than initially thought. Furthermore, the group is finalizing their agreements with several large insurance players, which we expect upon completion to further drive the patient volumes to GHK. Nonetheless, we still expect that GHK is still about a year away from achieving operational leverage.
• The political situation in Turkey has mellowed. Management guided that foreign patients from Europe are returning. Acibadem Altunizade continues to ramp up well as complex cases are decanted from Kozyatagi and Kadikoy hospitals.
• We continue to expect profitability to be eroded in the near term due to cost pressures arising from wage inflation, higher pre-operating and startup costs and finance costs.

Risks

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

Forecasts

• We lower our FY17 forecast by 6% as we raise our operating expense assumptions. We maintain our FY18-19 forecasts as we believe that hospitals opened in 2017 and those acquired in 2016 would ramp up and contribute positively to earnings.

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 take time to mature.

Valuation

• We maintain our SOP-derived TP of RM6.07.

Source: Hong Leong Investment Bank Research - 28 Nov 2017