IHH’s 1Q19 revenue of RM3,642.7m translated into core PATAMI of RM201.0m. We deem the results to be inline as we can expect a stronger 2H due to seasonality (2H18 accounted for c.60% of full year earnings), ongoing restructuring and related costs savings at Fortis and Acibadem which will be better reflected then. Our SOP based TP decreases to RM6.02 (from RM6.03) on model up keeping post release of the annual report. Maintain HOLD.

Within expectations. 1Q19 revenue of RM3,642.7m translated into core PATAMI of RM201.0m accounting for 18% of ours and 19% of ours and consensus full year forecasts. In deriving our core earnings, we have adjusted for EIs amounting to a net sum of RM111.5m. We deem the results to be inline as we can expect a stronger 2H due to seasonality (2H18 accounted for c.60% of full year earnings), ongoing restructuring and related costs savings at Fortis and Acibadem which will be better reflected then.

QoQ. Revenue improved by 15.1% QoQ (4Q18: RM3, 165.3m) on organic growth and ramp up in contributions from new hospitals, namely Fortis’s maiden full three months consolidation. Core EBITDA improved by 8.4% QoQ (we stripped off RM28.5m from a one off trustee management fee income relating to RHT’s asset disposal) namely attributed to a full quarter’s contribution from Fortis. Excluding the effects of MFRS16 EBITDA increased 1% QoQ. Adding back c.RM12.6m, losses on their USD cash balance, core PATAMI declined by 32.0% due to seasonality driven higher base in 4Q.

YoY. Revenue improved by 28.0% YoY on the back of contributions from new hospitals (GHK & Altunizade both opened in 2017), organic growth and continuous ramp up of existing hospitals in Malaysia (north Malaysia, Medini and KK) and Turkey (Maslak and Altunizade). Core PATAMI was eroded by -10.5% to RM201m due to higher financing costs (+28%) and higher tax expense by (92.3%) due to non-taxable income, non-tax deductible expense and unrecognised tax losses from GHK.

Turkey. IHH has successfully paired down c.USD250m equivalent on non-Lira denominated debt in April (balance outstanding c. USD 400m equivalent). This should provide some buffer from the Lira volatility. Management guided that the remaining outstanding balance will be partly converted into Lira.

Fortis. Fortis completed the acquisition of RHT’s assets in January, for a total cash consideration of INR4666.3 Crore (equivalent to RM2.70bn). We understand that the clinical establishment fees/lease payments saved from this exercise amounts to c.270 Crore per annum (equivalent to RM162.0m).

Forecast. Post release of the annual report our FY19-20 EPS adjusts downwards by 2% We introduce our FY21 numbers.

Maintain HOLD, TP: RM6.02. Our SOP derived TP decreases to RM6.02 (from RM6.03) on model up-keeping. Whilst we like IHH for its exposure to key gateway markets and astute management; earnings delivery in FY19-20 will be highly dependent on the velocity of them improving their increased exposures to India and Turkey.

Source: Hong Leong Investment Bank Research - 6 Jun 2019