We met up with 13 investors in Singapore over a one-day NDR in late March. Their interest in IHH centred mainly on: i) the business outlook of existing home markets, ii) performance of GHK, and iii) IHH’s strategy and direction in the Indian market. We came away positive on IHH’s earnings recovery in 2018, underpinned by the ramp-up of new hospitals and improving profitability from its existing home markets. Maintain BUY and TP of RM7.10.

Home Markets: Improving Profitability

For both the Singapore and Malaysia operations, we expect revenue to be driven by around a mid-single digit inpatient volume growth and 5-10% growth in revenue intensity per inpatient. An ageing population and complicated surgical cases are positive drivers for IHH’s sales. Coupled with the continued ramp-up of new hospitals, we expect EBITDA margins to improve towards the 30% level (2017: 28%). We are positive on 40%- owned Acibadem’s plan to halt greenfield expansions after the completion of the 2 hospitals and to focus on ramping up of its hospitals.

Improvement in Gleneagles Hong Kong (GHK) Is Encouraging

Bed occupancy rates improved after insurance companies accredited GHK as their panel hospital in 3Q17. GHK’s revenue intensity per inpatient was c.RM25k in 4Q17 vs. c.RM10k in 1Q17, although it should improve further given that GHK will introduce more complex surgical cases. Hence, we expect the start-up losses to narrow, and EBITDA breakeven to be achieved by late 2018 or early 2019.

India Market: Growth Through M&A at the Right Price

IHH announced that its bid offer of Rs160/share for Fortis Healthcare has been declined by the Board, but we believe that Fortis’ shareholders will still favour IHH’s higher offer price. Acquiring Fortis at the right valuation will provide a quick penetration into India’s healthcare market despite some short-term earnings drag. We believe that IHH’s experience would help turn around Fortis’ performance.

Maintain BUY With Unchanged DCF-derived TP of RM7.10

We reaffirm our BUY rating on IHH with a 12-month DCF-derived TP of RM7.10. Post the 31% decline in 2017 core net profit, we believe that the worst is over and that IHH should benefit from an earnings recovery driven by the ramp-up of new hospitals. Development of the Fortis deal would be a near-term catalyst. Downside risk: higher-than-expected start-up loss.

Source: Affin Hwang Research - 24 Apr 2018