IHH’s 1H18 core earnings of RM403.9m (-6.8% QoQ, +4.0% YoY) were slightly below ours and consensus expectations due to (i) higher finance cost and (ii) start-up costs associated with newly opened hospitals. Our forecast is reduced by 4.8-6.8% for FY18-20 as we calibrate our TRY assumptions in light of the recent volatility. Maintain HOLD, our SOP based TP is reduced to RM6.16 (from RM6.33).

Below. Results came in below expectation as 1H18 revenue of RM5514.7m translated into core earnings of RM403.9m, making up 44.5% of HLIB and 45.8% of consensus expectations. In deriving our core earnings, we have adjusted for EIs amounting to a net sum of RM181.6m.

QoQ. Revenue declined by 6.8% QoQ to RM2659.7m (1Q18: RM2855.0m) due to the strengthening of RM against the currencies of its other operating markets whilst EBITDA declined by 13.3% QoQ to RM527.9m on the back of higher operating costs. Excluding the impact of currency erosion from other operating markets, EBITDA declined c.7% on the back of higher cost of purchase and operating costs incurred in USD and EURO- especially from Turkey. Core PATAMI eroded by 20% due to a higher base QoQ of forex effects on the groups USD denominated cash (+RM103m in 1Q18 vs. -RM77.1m in 2Q18).

YoY. On constant currency basis, revenue improved by 14.0% YoY on the back of contributions from new hospitals (GHK & Altunizade) and organic growth and continuous ramp up of hospitals opened in 2017. Consequently, EBITDA increased by 13% YoY. Core PATAMI improved by 108.1% to RM179.4m on the back of a low base in 2Q17 resulting from higher start-up costs from GHK and Altunizade, coupled with the removal of the gain on disposal of their stake in Apollo (RM241.m).

YTD. Revenue of RM5154.7m grew marginally by 1.1% despite stronger operational performance across all home markets. This is attributed to the stronger RM vs. currencies of other home markets. Consequently EBITDA grew 3% to RM1136.8m. On constant currency basis, topline grew 15% whilst EBITDA grew 14% YoY. The better performance YoY was namely attributed to the ramp up in operations of hospitals opened in 2017; organic growth of existing hospitals and to a lesser extent the narrowing of loses from GHK (-RM94.5m vs. -RM128.1m). Core PATAMI improved by 40.3% YoY on the back of a low base in 1H17.

Turkey. The group will accelerate its plans to reduce the foreign debt burden by converting its EUR/USD debt into Lira and reducing the absolute amount via the disposal of non-core assets. The conundrum faced by the group is that borrowing costs in Turkey are c.20-25%. On that note, management guided that the recent depreciation in Lira has seen an influx of medical tourist numbers, with c.30% of medical tourist volumes being private insurance patients.

Forecast. We are updating our TRY-MYR assumptions from 1.10 to 0.89 for FY18- 20. Subsequently our FY18-20 earnings are reduced by 4.8%-6.8%.

Maintain HOLD, TP: RM6.16. Post earnings revision, our SOP based TP decreases to RM6.16 (from RM6.33) .Our TP implies FY19-20 EV/EBITDA of 15.5x-13.8x. 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 - 29 Aug 2018