IHH’s 4Q19 core PATMI of RM292.1m (+11.8% QoQ, -0.8% YoY) brought FY19 sum to RM983.9m (+2.7% YoY). The results were within our expectations at 101.8% but slightly above consensus’ at 107.6%. FY19 better performance was driven by sustained organic growth as well as better operational leverage thanks to the ramp up of newer hospitals. We cut our FY20-21 earnings by 10%- 12% to account for a more modest outlook due to COVID-19. We reiterate our HOLD call with lower SOP based TP of RM5.53 (from RM5.68).

Within expectations. 4Q19 core PATMI of RM292.1m (+11.8% QoQ, -0.8% YoY) brought the FY19 sum to RM983.9m (+2.7% YoY). We arrived at our Core PATMI after adjusting for net EI of -RM251.5m (amongst others, RM200m impairment loss on Global hospitals, and others includes other impairments, disposal, changes in fair value and foreign exchange). The results were within our expectations at 101.8% but slightly above consensus’ at 107.6%.

Dividend. Declared single and final dividend of 4 sen per share going ex on 30 March 2020. (FY18: 3 sen per share). This represents a payout ratio of 75% yielding at 0.7%.

QoQ. Revenue increased slightly (+1.3% QoQ) to RM3.8bn (3Q19: RM3.7bn) as revenue per inpatient improved in Singapore, Malaysia and India (+2.7%, +2.9%, +1.1% respectively), partially offset by reduction in inpatient admission volume by - 2.1%, -0.9% and -5.9% respectively. The increase in revenue per inpatient was due to the increase in foreign patients in Singapore and Malaysia market. Accordingly, EBITDA improved by 8.8% QoQ to RM901.5m on better operational leverage and improved revenue intensity in Singapore and Malaysia. Core PATMI increased to RM292.1m (+11.8% QoQ) despite increase in finance costs (>100% QoQ).

YoY. Revenue was boosted (+21.2% YoY) thanks to the continuous ramp up of Gleneagles Hong Kong (GHK) and Acibadem Altunizade (both opened in Mar 2017), increased capacity at Acibadem Maslak (expansion completed in October 2018) along with new contribution from Fortis (Nov 2018). EBITDA increased (+24.5% YoY) whilst margins improved slightly by 0.6ppts even though operating expenses rose (+48.4% YoY). However, core PATMI was flattish (-0.8% YoY) because of higher depreciation costs (+36.1% YoY) as well as higher interest expense (+4.0% YoY) due to additional loans taken for Fortis acquisition and refinancing of Acibadem’s non-Lira debt.

FY19. Revenue of RM14.9bn increased (+29.4% YoY) backed by stronger performance from existing operations, continuous ramp up of GHK and Acibadem Altunizade (both opened in 2017), increased capacity at Acibadem Maslak (2018) and newly acquired Fortis (2018). Thus, EBITDA growth (+32.8% YoY) mirrored revenue growth. Although EBITDA increased by +32.8%, core PATMI only increased by +2.7% due to higher tax recognized. FY19 tax expenses increased (+>100% YoY) due to tax on cash dividends received from RHT Health Trust and on cash that was further upstreamed as dividends from Fortis subsidiaries to Fortis Healthcare Limited.

Outlook. The outbreak of COVID-19 is expected to have an impact to IHH; with the slowdown of medical tourism (i.e. Singapore and Malaysia) as well as patients delaying non-emergency treatments (i.e. cataract, health screening). In Greater China, while this market is likely to be affected the most, it only contributed c.5% to total revenue in FY19. Construction on Gleneagles Shanghai is currently being put to halt due to COVID-19, this may postpone the scheduled opening which is set in 2H20.

Forecast. While results were in line, we take the opportunity to cut our FY20-21 earnings by 10%-12% to account for COVID-19 impact from Singapore YoY.

We recognise that Singapore receives many foreign patients (medical tourism) (c.25% of Singapore revenue); we expect the volume of foreign patients to reduce as well as local patients delaying non-emergency treatment due to COVID-19.

Maintain HOLD, TP: RM5.53. We maintain our HOLD call. Post earnings adjustments, our SOP based TP reduced to RM5.53 (from RM5.68). Our TP implies FY20-21 EV/EBITDA of 16.8x-15.4x.

Source: Hong Leong Investment Bank Research - 9 Mar 2020