IHH’s 1QFY18 net profit decreased by 88% yoy to RM57m, but after excluding exceptional gains in 1QFY17 and forex losses in 1QFY18, core net profit improved by 11% yoy to RM225m. Core earnings were broadly in line with our and consensus forecasts (23% of full year estimates). As inpatient admissions and revenue intensity per inpatient improvements were seen across all home markets, we continue to be positive on IHH’s prospects moving forward and maintain our BUY rating with an unchanged TP of RM7.10.

1QFY18 Headline Core Net Profit Dragged by Exceptional Items

IHH’s 1QFY18 headline net profit declined by 88% mainly due to a high base effect in 1QFY17 when they recognized a RM313.4m gain from the disposal of interest in Apollo Hospital Enterprise Limited as well as a RM104m forex loss on the Group’s US$-denominated cash balances. Stripping off these exceptional items, 1QFY18 core net profit improved by 11% yoy and 23% qoq to RM224.5m. This improvement came from a rise in revenue by 6% yoy and EBITDA growth of 8.0% yoy arising from sustained growth across existing operations as well as the ramp up of GHK and Acibadem Altunizade that opened in March 2017.

Margins Continue to Hold Up

EBITDA margins in IHH’s home markets of MY and SG remained flat in 1QFY18 on a qoq basis, while marked improvements continue to be seen in the North Asia (GHK) and Indian operations. Notably, GHK saw narrowing of startup losses in 1QFY18 (EBITDA loss of RM46.6m in 1QFY18 vs RM81.1m in 1QFY17). Inpatient admissions saw growth across all home markets: SG grew by 2.7% yoy, MY was flat, India grew by 6.7% and Acibadem grew by 14.4%. This also came in tandem with improved revenue per inpatient admission across the board (5-14% growth yoy) due to more complex surgical procedures performed in 1QFY18. Separately, IHH announced that they have extended the validity of their offer to acquire a stake in India’s Fortis Healthcare till June 30th.

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

As we are still upbeat on IHH’s expansion plans and the ramping up of new hospitals moving forward, we keep our forecasts unchanged. We believe pre-operating costs and start-up costs of new operations can be adequately mitigated by the ramping up of patient volumes and improving revenue intensity per inpatient. Thus, we maintain our BUY rating with an unchanged DCF-derived TP of RM7.10. Key risks: higher-than-expected startup losses. (this note marks a transfer of coverage)

Source: Affin Hwang Research - 28 May 2018