1Q17 net profit doubled to RM470m, but core net profit was -15%yoy if we exclude gains from the partial divestment of non-core assets. IHH’s core hospital operations were dragged down by new hospital start-up costs and pre-operating costs, which we had highlighted in a recent company update. We think these headwinds may persist in the near term, posing the risk of a downward consensus earnings revision. Maintain HOLD rating, with a slightly higher TP of RM6.56.

New Hospital Openings Drag Down Profitability

1Q17 revenue rose by 8% yoy to RM2.684bn, but EBITDA declined by 6% yoy due to higher pre-opening and start-up losses from new hospitals. The 500-bed Gleneagles Hong Kong (GHK) and 350-bed Altunizade Hospital commenced operations in March 2017. Pre-operation losses for GHK were RM81.1m compared to RM38.4m in 4Q16. Core net profit declined by 15% yoy to RM201.8m due to incremental depreciation, amortization and finance costs with the opening of the 2 new hospitals. However, headline net profit doubled to RM470m due to an RM313.4m gain on the disposal of a 6.07% interest in Apollo Hospital Enterprise Limited done in early March. The 1Q17 core net profit accounted for 21% and 18% of our and consensus full-year estimates, respectively. While it was slightly below consensus expectations, we view it as in line with our forecast as we expect stronger profit in the remaining 3 quarters when GHK and the Altunizade Hospital start to ramp up.

Maintain HOLD With Slightly Higher TP of RM 6.56

We fine-tune our FY17-19 net profit forecasts upon the release of IHH’s 2016 annual report. We maintain our Hold rating with a slightly higher 12- month TP of RM6.56 (from RM 6.47). We like IHH for its aggressive expansion into regions where healthcare demand is underserved, and believe 2018 could be a better year when new hospitals start to contribute more meaningfully. Downside risk: geopolitical risk in Turkey; upside risk: lower-than-expected start-up costs.

Source: Affin Hwang Research - 22 May 2017