IHH’s 2Q18 core net profit improved by three-fold to RM257m largely on improved margins. Stronger RM distorted stellar performance on constant currency terms as admission rates held admirably amid an upswing in revenue intensity. We continue to like IHH’s execution and its prospects, maintain our BUY rating with an unchanged TP of RM7.10.

2Q18 Core Net Profit Surged Three-fold

IHH’s 2Q18 core net profit surged three-fold to RM257m largely on improved margins, 6M18 core net profit of RM482m (+63% yo) was in-line with our expectation but above consensus at 50% and 55% of full year estimates respectively. Revenue for the quarter was marginally lower by - 4% yoy upon translation of foreign operations against the stronger RM. In constant currency terms, revenue grew by 14%. Inpatient admissions across key markets were either flat or contracted with the exception of Acibadem, growing 8% yoy. Soft admission rates were in-part due to revenue per inpatient admissions being lifted by 8.4%-19.9% yoy. Nonetheless, 2Q18 headline net profit declined by 48% mainly due to exceptional items, i) translation losses of Turkey operations (-RM189m) and ii) RM241 disposal gain of Apollo Hospital in 2Q17.

Execution Makes Headway

The increasingly gestated Gleneagles HK launched back in Mar 2017 saw shrinking losses in 2Q18 of –RM45m from -RM54m in 2Q17. It lifted overall margins, as it improved by 3.8ppt to 22.8%. Singapore was another bright spot as EBITDA margins improved 2.8ppts yoy off higher inpatient revenue. Remaining key markets including Malaysia and Turkey maintained its margins as India fell into minimal losses. We expect the revenue intensity to persist and translate into improving margins as IHH forges ahead, not forgetting diminishing GHK and Acibadem Altunizade start-up losses.

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

Following Fortis’ board of approval of IHH’s proposed acquisition, it draws IHH closer to its much anticipated pipeline of growth – with only regulatory approval from the India authorities pending. Fortis’ turnaround hinges on IHH’s consistent execution, which was well on display with the quarter’s firm organic earnings recovery. We maintain our BUY rating with an unchanged DCF-derived TP of RM7.10. Key risks: unfavourable forex, heightened regulatory hurdles and underwhelming execution.

Source: Affin Hwang Research - 29 Aug 2018