IHH’s FY17 net profit increased by 58% yoy to RM970m, but core net profit declined by 30% yoy to RM595m after excluding exceptional gains. Core earnings was in line with our forecast of RM606m but below consensus forecast (90% of full year estimates). Although start-up losses and depreciation expenses of new hospitals such as GHK were a drag on 2017 earnings, we are getting positive on their earnings contributions in 2018 due to strong ramp up of operations. We upgrade IHH to BUY with a higher TP of RM7.10.

2017 Core Net Profit Was in Line With Our Expectation

2017 revenue increased by 11% yoy to RM11.1bn (driven by 8% yoy growth in SG, 13% yoy in MY, 28% yoy in North Asia, 26% yoy in India and 11% in Acibadem group). EBITDA margin declined by 2.7ppts to 20% mainly due to start-up losses from GHK which amounted to RM283m. Matured markets such as SG and MY continued to see EBITDA margin improvement driven by the ramp up of new hospitals and improvement in both patient volume and revenue intensity per patient. In 4Q17, GHK’s loss narrowed to RM65m (from RM 69m in 3Q17) as bed occupancy rate improved to c.50-60% and 1Q18 is likely to see further improvement due to the flu epidemic season. Overall, 2017 core net profit of RM595m was within our estimates but below consensus, accounting for 98% and 90% of full year forecast respectively. Also, a 3 sen DPS was proposed.

Decent Performance Across All Home Markets

In 4Q17, IHH saw inpatient volume grow healthily by 6.3% yoy in SG, 4.3% in MY, 15.4% in India, and 13% in Acibadem. Similarly, revenue intensity per inpatient grew by 6.2% yoy in SG, 10% in MY, 4% in India, and 20% in Acibadem. This was attributable to more complex surgical cases performed in 4Q17. As a result, EBITDA grew by 10% in SG, 35% in MY and 51% in Turkey, offsetting the startup loss of RM65m in GHK.

Upgrade to BUY With Higher DCF-derived TP of RM7.10

We introduce 2020E EPS and increase 2018-19E net profit by 14-15% to assume lower losses from GHK given that its revenue grew 20% qoq and its bed occupancy rate was ramping up faster than our expectation in 4Q17. Also, we adjust EBITDA margin for SG and MY slightly to account for better revenue/intensity. While IHH’s earnings was affected in 2017 due to start-up losses of new hospitals and integration cost of new operations, we believe that IHH should deliver stronger earnings in 2018 as these hospitals ramp up their operations. Upgrade to BUY with TP of RM7.10. Downside risk: higher-than-expected start-up losses.

Source: Affin Hwang Research - 28 Feb 2018