IHH’s 9M18 core earnings of RM663.1m (+60.4% YoY) were within ours, however above consensus expectations. The improving results were due to better operational leverage driven by ramp up of newer hospitals, organic growth, tighter cost controls and better case mix YoY. Maintain our HOLD call and SOP based TP of RM5.32.

Inline. 9M18 revenue of RM8,355.6m translated into core earnings of RM663.1m which is in line with our expectations, accounting for 76.6% of our full year forecasts and 87.2% of consensus. In deriving our core earnings, we have adjusted for EIs amounting to a net sum of RM544.7m.

QoQ. Revenue improved by 6.8% QoQ to RM2,840.9m (2Q18: RM2,659.7m) bouncing back from a slower 2Q18 due to Ramadhan and Eid. Consequently, EBITDA improved by 16.8% QoQ to RM616.8m on better operational leverage. Despite higher net financing costs on the back of the erosion in the group’s EUR and TRY borrowings against the USD, core PATAMI improved by 44.4% in tandem with EBITDA.

YoY. On constant currency basis, revenue improved by 18.0% YoY on the back of contributions from new hospitals (GHK & Altunizade), organic growth and continuous ramp up of existing hospitals in Malaysia and Turkey. Consequently, EBITDA increased by 9.7% YoY whilst margins improved by 3ppts to 22% on the back of improving group cost synergies. Core PATAMI improved by 106.6% to RM259.1m on the back of a low base in 2Q17 resulting from higher start-up costs from GHK and Altunizade and better operational leverage.

YTD. Revenues grew marginally by 1.2% to RM8,355.6m on stronger operational performance across all home markets, whilst EBITDA grew 5.4% to RM1753.6m against the backdrop of a stronger MYR YoY. On constant currency basis topline grew 16% whilst EBITDA grew 17% YoY. The better performance YoY is namely attributed to the ramp up in operations of hospitals opened in 2017; organic growth of existing hospitals and continuous cost efficiency drive across the group. EBITDA margins improved by 0.9ppts to 21%. Core PATAMI improved by 60.4% YoY on the back of a low base in 9M17.

Turkey. In light of the recent corporate activity, the group will accelerate its plans to reduce the foreign debt burden by capitalizing the shareholders loan and disposing of non-core assets. The depreciation in Lira has seen an influx of medical tourist numbers on better case mix especially from the Balkan states. Consequently, on constant currency terms revenues (+38%) and EBITDA (+66%) accelerated YoY further aided by price revisions for both insurance and out of pocket patients.

India. Parkway Pantai’s India saw in inpatient volumes dropping by 20.7% YoY on the loss of key specialist doctors. The group will remedy this by rebalancing its clinical disciplines on offer which will require a few quarters to gain traction. On Fortis, they will look to stabilize the ship and improve operational margins in the short term given they were only recently appointed to the board.

Forecast. Unchanged as the results were within expectations.

Maintain HOLD, TP: RM5.32. Maintain our SOP based TP of RM5.32. Our TP implies FY19-20 EV/EBITDA of 16.3x-15.5x. Whilst we like IHH for its exposure to key gateway markets and astute management; earnings delivery in FY18-19 will be dependent upon the group’s ability to improve their position in Turkey and India given their greater exposure to these two markets.

Source: Hong Leong Investment Bank Research - 28 Nov 2018