IHH’s 1Q18 core earnings of RM224.5m (-1% QoQ, +6.3% YoY) were slightly below ours and consensus expectations due to (i) higher finance cost and (ii) start-up costs associated with newly opened hospitals. Operating statistics remain robust across all 4 key markets. Our forecast is reduced by 9-17% for FY18-20 as we calibrate our assumptions of higher finance costs and overall higher cost structure moving forward. Despite the earnings cut, our SOP based TP marginally increases to RM6.33 (from RM6.07) as we roll forward our valuation horizon from FY18 to mid-FY19. We expect earnings to ramp up in FY19 as GHK and Altunizade achieves greater operational leverage.

Below. 1Q18 revenue of RM2855.0m translated into core earnings of RM224.5m, making up 22.5% of HLIB and 23% of consensus expectations. In deriving our core earnings, we have adjusted for EIs amounting to a net sum of RM167.3m. The results came in slightly below expectation due to (i) higher finance cost (+20.8% YoY) and (ii) high start-up costs of associated newly opened hospitals.

QoQ. Revenue marginally declined by 1.0% QoQ to RM2855.0m (4Q17: RM2885.1m) on the back of the erosion of the SGD and TLR versus the RM. Excluding the impact of the depreciation of the TLR and SGD group EBITDA grew c.4% QoQ. PATAMI declined 40% QoQ however excluding the exchange losses of RM104m from the USD cash balance then core earnings grew 23.4% to RM224.5m.

YoY. Revenue grew 6.3% YoY to RM2.855.0m on the back of contributions from new hospitals (GHK & Altunizade) and organic growth of existing operations as well as continuous ramp up of hospitals opened in 2017. Consequently, EBITDA increased by 7.7% to RM608.9m on higher revenue. Core PATAMI improved by 11.3% to RM224.5m despite the higher incremental D&A expenses on completion of new hospitals and a higher overall cost structure.

Operating statistics. (i) Inpatient volume: Volume growth across all 3 home markets – Singapore (double digit local patients), Turkey (Altunizade and Bulgaria operations ramp up) and India grew 2.7%, 6.7%, and 14.4%, driven by demand from local and foreign patients whilst Malaysia saw a marginal decline of -0.6% partially attributed to seasonality. (ii) Revenue per inpatient: Growth in inpatient revenues across all 4 homes markets attributed to better case mix (SG +5.1%, MY +9.7%, IND +8.5%, TRY+14.4%).

India. The group’s India operations continue to gain traction, they are amongst largest multi organ transplant player in India. In the first 4 months of 2018 the group has done c.200 transplants averaging 2 per day (heart, liver, lung & kidney). On Fortis, IHH has further extended their offer period till 30th June.

China. GHK continues to ramp up at a healthy level. Losses have narrowed to RM46.6m from RM65.3m QoQ on better operating leverage. Outpatient volumes showing a growth of 53% MoM, whilst Inpatient volumes showing a growth of 65% MoM with occupancy rate at c.45% in 1Q18.

Forecast. Our FY18-20 earnings are revised downwards by 9-17% as we calibrate our assumptions with the higher finance costs and overall higher cost structure.

Maintain HOLD, TP: RM6.33. Despite the earnings cut, our SOP based TP increases to RM6.33 (from RM6.07) as we roll forward our valuation horizon from FY18 to mid FY19. Our TP implies FY19-20 EV/EBITDA of 16.6x-14.4x. Whilst we like IHH for its exposure to key gateway markets and astute management; earnings delivery in FY18 will be hampered by higher operational costs before a ramp up in operations in FY19.

Source: Hong Leong Investment Bank Research - 28 May 2018