IHH’s 2018 core earnings of RM1,027.6m (+73% yoy) was a tad above our expectations, but only due to a RM74m revaluation gain. Operationally, 2018 core earnings were in line with our estimates. Overall, IHH reported a stronger set of operational metrics yoy. We continue to like IHH’s execution and its prospects, and reiterate our BUY rating with TP of RM6.36.

2018 Core Earnings Beat Expectation

IHH reported a higher 4Q18 core net profit of RM341.5m (+88% yoy), bringing full-year core net profit to RM1,027.6m (+73% yoy), representing 106% and 129% of our and consensus’ estimates respectively. This was mainly driven by stronger operational performance. Inpatient admissions were particularly strong for India (due to the inclusion of Fortis’ inpatient admissions) and Malaysia (due to ramp-up of new hospitals), but relatively flat for Singapore and India. Despite reporting flattish growth in inpatient admissions, both Singapore and Acibadem operations’ revenue per inpatient admission grew by 9% and 32% yoy, mainly due to more complex cases taken and price increase imposed on private insurance and out-of-pocket patients. Overall, revenue per inpatient admission was positive for its key markets in 4Q18, with the exception of India which contracted by 7% yoy, due to the inclusion of Fortis which has lower revenue intensity as compared to IHH’s existing operations in India.

A Robust 4Q18

Revenue and EBITDA for the quarter grew by 10% and 18% yoy respectively, mainly fueled by: i) organic growth from existing operations, ii) continuous ramp-up of Gleneagles Hong Kong (GHK) and Acibadem Altunizade as well as iii) contribution from the newly-acquired Amanjaya specialist centre and Fortis Healthcare. On constant currency terms, the growth would have been stronger at 28% and 33% yoy respectively.

Strong Execution Led the Way

IHH has completed the acquisition of a controlling stake in Fortis in November 2018 and subsequently the acquisition of RHT in January 2019 as planned. Notably, Fortis has contributed a better-than-expected core net profit of RM2.8m to the Group in 4Q18, mainly due to lower cost of borrowings as management had paid-off the loans with higher interest cost and is working with banks to lower its cost of borrowings. On the other hand, GHK continued to see decent bed occupancy rate at c.60% level (3Q18: c.50%), with start-up losses narrowing yoy and qoq to RM39.4m, as a result of operating leverage.

Source: Affin Hwang Research - 28 Feb 2019