IHH’s 2Q17 net profit increased to RM316.6m (29% yoy), but core net profit declined 50% yoy if we exclude gains from the partial divestment of non-core assets. While IHH’s core hospital operations in Malaysia and Singapore are seeing earnings growth, higher new hospital start-up costs, pre-operating costs, amortization and finance cost continue to drag IHH’s profit. As these headwinds may persist, we maintain a HOLD rating with an unchanged TP of RM6.56.

Solid Revenue Growth Dampened by New Hospital Costs

IHH’s 2Q17 revenue rose by 12% yoy to RM2.771bn, on the back of 10- 30% revenue growth across major key markets. However, EBITDA declined 8% yoy due to higher pre-opening and start-up losses from new hospitals. Gleneagles Hong Kong (GHK) which opened in March 2017 saw EBITDA losses widened to RM67.8m in 2Q17 (1Q17: RM81.1m). On the other hand, Acibadem’s EBITDA declined 9% yoy due to lower utilisation at Acibadem Kadikoy and Acibadem Kozyatagi, following the decanting of patients with complex conditions to Acibadem Altunizade. Higher operating costs and depreciation of Turkish Lira were also the culprits.

Disposal Gain Saved Bottom Line

The higher 2Q17 headline net profit of RM 316.6m (+29%yoy) was only due to a gain on disposal of the remaining 4.78% stake in Apollo Hospital, which amounted to RM241m. Excluding EIs, core net profit declined by 50% yoy to RM86.2m, mainly due to higher depreciation (+22%yoy), amortisation (+11%yoy) and finance costs (+60%yoy), following the opening of 2 new hospitals in Hong Kong and Istanbul in March 2017. At the EBITDA level, 1H17 accounted for 42% of our and consensus full year forecast, which we deem as largely in line as we expect higher EBITDA in 2H17 as 2 new hospitals which opened in March, to continue to ramp up operations. However, core net profit of RM288m fell short, accounting or 30% of our 2017 forecast, below our and consensus’ estimates.

Maintain HOLD With Unchanged DCF-derived TP of RM6.56

We lowered our core net profit by 6% to 10% for 2017-19E taking into account higher depreciation and finance cost. IHH’s borrowings has increased by RM513m for working capital, capex, and potentially acquisition. While we like IHH for its aggressive expansion into regions where healthcare demand is underserved, we are concerned over prolonged losses arising from the new hospitals. Trading at a 2017 PE of 57x, we find the premium valuation unattractive at this level. Maintain Hold.

Source: Affin Hwang Research - 24 Aug 2017