IHH Healthcare’s 9M18 core earnings came in within our estimate, growing by 66% yoy mostly due to improving margins. IHH’s core home markets, particularly Malaysia and Singapore, saw decent admission growth and improved revenue per inpatient admission. This was also supported by strong growth in the Acibadem operations from higher foreign patient visitations. We continue to like IHH’s execution and its prospects, and reaffirm our BUY rating with an unchanged TP of RM6.36.

9M18 Core Earnings Within Estimates

IHH’s 9M18 core net profit of RM686mm (+66% yoy) was broadly in line with our expectation but above the consensus at 71% and 90% of the fullyear estimates respectively. Revenue for the quarter was marginally higher by 1% yoy, but was 16% higher in constant currency terms. Inpatient admissions were particularly strong for Acibadem (higher foreign patient visitations) and Malaysia (ramp-up of new hospitals), but relatively flat to negative for Singapore (-0.7%) and India (-21%). Nonetheless, the average revenue per inpatient admission was positive for all key markets with Acibadem showing the strongest growth at 32% due to an increase in case complexity and increase in the number of foreign patients. The 9M18 headline net profit was affected by exceptional items including: i) translation losses of the Turkey operations (-RM1.1bn), and ii) the RM554.5m disposal gain on Apollo Hospital in 2017.

Year-end Completion Pivots IHH for An Exciting FY19

We expect IHH to complete its pending corporate exercises by year-end, fueling its long-term growth ambitions. To recap, we expect the Indiabased Fortis Healthcare to be value-accretive to IHH shareholders at a range of RM6.76-RM6.85, dependent on the acceptance level. Meanwhile, we expect the raised stake in Acibadem (Turkey) to 90% from 60%, conditional upon approval from Bank Negara Malaysia, to have a neutral impact on valuations as it should be offset by an enlarged share base.

Maintain BUY With Unchanged DCF-derived TP of RM6.36

With the lira depreciation risk abating, we believe that IHH should deliver stronger earnings moving forward supported by excellent operational execution especially on its strategic corporate exercises to expand its regional footprint and enhance growth visibility. We maintain our BUY rating with an unchanged DCF-derived TP of RM6.36 (CoE of 7.8-15.3% for the different geographical operations and terminal growth of 3.8%). Key risks: unfavourable forex, heightened regulatory hurdles and underwhelming execution.

Source: Affin Hwang Research - 27 Nov 2018