IHH’s 3QFY19 core PATMI of RM261.3m (+13.9% QoQ, +0.9% YoY) brought the 9MFY19 amount to RM691.7m (+4.3% YoY). The results were below expectations due to higher depreciation costs YoY from Fortis (acquired in 4QFY18). YTD improved results were driven by better operational leverage driven by ramp up of newer hospitals and organic growth. We cut our FY19-21 forecasts by -13% to -5% to better reflect increase in depreciation costs. As we roll forward to mid FY20 (from FY19), and post earnings adjustments, our SOP based TP increases slightly to RM5.68 (from RM5.66). Maintain HOLD.

Below expectations. 3QFY19 core PATMI of RM261.3m (+13.9% QoQ, +0.9% YoY) brought 9MFY19 sum to RM691.7m (+4.3% YoY). The result was below our expectations at 62% of our full year forecasts and 70% of consensus. The deviation was mainly due to higher than expected depreciation YoY mainly from Fortis (Nov 2018) which is consolidated in 4QFY18.

QoQ. Revenue improved by 3.9% QoQ to RM3,788.4m (2QFY19: RM3,645.3m) bouncing back from a slower 2QFY19 due to Ramadhan and Eid holidays. Consequently, EBITDA improved by 7.1% QoQ to RM828.9m on better operational leverage. Core PATMI increased by 13.9% mainly due to decreased in finance costs (-51.4%). Singapore, Malaysia and India inpatient admissions volume increased (+1.8%, +10.0% and +12.6% respectively). However revenue per inpatient decreased slightly for Singapore (-0.1%) and Malaysia (-2.3%) due to case mix take up by hospitals, but for India (-5.5%) the decrease was due to dengue season, of which dengue cases are less revenue intensive.

YoY. Revenue grew (+33.4% YoY) on the back of sustained organic growth from existing operations and the continuous ramp up of Gleneagles Hong Kong (GHK) and Acibadem Altunizade (both opened in 2017), as well as new contributions from Amanjaya (Oct 2018) and Fortis (Nov 2018). EBITDA increased by 34.4% YoY whilst margins improved slightly by 0.2ppts due to increase in operating expenses (+85.8% YoY). All in, core PATMI improved by 0.9% to RM261.3m.

YTD. Revenue of RM11,076.4m increased (+32.6% YoY) thanks to stronger performance from existing operations and the continuous ramp up of GHK and Acibadem Altunizade (both opened in 2017) and newly acquired Amanjaya (Oct 2018) and Fortis (Nov 2018). Thus EBITDA growth (+36.2% YoY) was backed by improved overall revenue intensity (+3% YoY). By eliminating impact from MFRS16, revenue and EBITDA increased 38% and 27% respectively. Despite higher staff costs (+19.6% YoY) and operating expenses (+61.1% YoY), core PATMI increased by 4.3% YoY.

Outlook. GHK’s start-up losses narrowed (9MFY19: -RM107.2m vs 9MFY18: - RM138.7m) as a result of improving operating leverage. The Hong Kong protests had limited impact to GHK as it is not in the protest areas. While it seems that patients have deferred non-essential procedures in GHK, there has been a growth in major specialities in the quarter (oncology, radiology and chemotherapy). On the other hand, Gleneagles Chengdu Hospital has commenced operations in Oct 2019, with 100 beds and 24 doctors on board. The proposed acquisition of Prince Court Medical Centre is set to strengthens IHH’s position in Malaysia with its prime location in the heart of KL.

Forecast. We cut our FY19-21 forecasts by -13%, -8% and -5% respectively to better reflect increase in depreciation costs.

Maintain HOLD, TP: RM5.68. Despite our forecast cuts, as we roll forward to mid FY20 (from FY19), our SOP based TP increases slightly to RM5.68 (from RM5.66). Maintain our HOLD call. Our TP implies FY19-20 EV/EBITDA of 18.4x-16.4x.

Source: Hong Leong Investment Bank Research - 2 Dec 2019