IHH’s 3Q17 net profit and core net profit decreased to RM82.1m (-53% yoy) and RM125.4m (-42%yoy) respectively. 9M17 core net profit of RM413.4m (-34% yoy) only accounted for 47-48% of our and consensus expectations. We cut FY17-19E earnings by 25-30% due to a slow ramp-up of Gleneagles Hong Kong, higher depreciation cost from new hospitals, and higher finance cost arising from more borrowings. As these headwinds may persists, we maintain a HOLD rating with a lower TP of RM6.04.

New Hospital Costs Continue to Drag Top Line in 3Q17

3Q17 revenue rose by 15% yoy to RM2.8bn, on the back of 10-45% revenue growth across major key markets. However, EBITDA declined 5% 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 of RM69m in 2Q17 (1Q17: RM81.1m and 2Q17: RM67.8m). -6% qoq in North Asia’s revenue also suggested that the ramp-up of GHK was slower-than-expected. On the other hand, Acibadem’s EBITDA grew 44% yoy to RM120.5m on the back of 18% yoy revenue growth, ramp-up of new hospitals and Bulgarian hospitals acquired in 2016. In overall, the 9M17 core net profit of RM413.4m was below expectation and accounted for 47-48% of full-year estimates mainly due to higher gestation cost from GHK, higher depreciation costs and finance cost from new hospitals.

Core Markets Holding Up Well

9M17 EBITDA of RM1,615m (-6% yoy) only accounted for 60% of our fullyear estimates. The disappointment mainly came from North Asia region (dragged by GHK) while other core markets were performing within expectation. In 3Q17, Singapore’s and Malaysia’s revenue increased by 9% yoy and 12% yoy driven by 12-14% yoy increase in revenue intensity. Singapore’s EBITDA margin expanded 3.6ppts yoy to 27.8% due to healthy utilisation rate of beds and higher revenue intensity.

Maintain HOLD With Lower DCF-derived TP of RM6.04

We lowered our core net profit by 25-30% for FY17-19E taking into account higher initial loss of GHK, higher depreciation and finance cost. IHH’s borrowings has increased 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. Maintain HOLD with lower TP of RM6.04.

Source: Affin Hwang Research - 28 Nov 2017