Despite the lingering concerns over an impairment risk on its 31% stake in Fortis and the weakening of the Turkish Lira, we think that overall positives still outweigh the negatives. We expect IHH to continue delivering stronger earnings moving forward on the back of its strong execution and healthy prospects. The current valuation is attractive at -1SD below its 5-year PER and EV/EBITDA mean. We reaffirm our BUY rating with a 12-month SOTP-based TP of RM6.49.

Outlook Remains Positive

IHH staged a strong earnings recovery in 2018 as core net profit grew by 73% yoy to RM1.0bn. We expect IHH to continue delivering stronger earnings going forward, underpinned by: i) organic growth at its home markets, ii) continual ramping-up of young hospitals such as Gleneagles Medini, Gleneagles Kota Kinabalu and Acibadem Altunizade as well as new bed capacity at Pantai Hospital Kuala Lumpur, iii) shrinking start-up losses from GHK, and iv) accretive earnings contributions from Fortis.

No Rainbow Without a Little Rain

While we do not rule out the possibility of any adjustment or impairment on Fortis given the ongoing investigation, we think that the chances of goodwill impairment stemming from Fortis’ profitability are diminishing as management has taken several measures to enhance profitability i.e. lower borrowings cost and clinical establishment cost savings. Besides, for its Acibadem operations, while we acknowledge that there is always a risk of forex volatility of the Turkish Lira against the Ringgit, Acibadem’s operations have remained resilient, with past-5-year CAGRs for inpatient admission and revenue per inpatient of 14% and 10% respectively.

Maintain BUY With a Higher TP of RM6.49

We reduce our 2019-21 EPS estimates by 18-24% as we: 1) postpone our EBITDA breakeven forecast for GHK by one year to 2020E (from 2019E), 2) adjust our currency assumptions mainly to account for the weakening of the Turkish Lira against the Ringgit, and 3) impute a higher interest rate from the swap into local Turkish Lira-denominated loans. Despite lowering our earnings estimates, our SOTP-based TP has increased from RM6.36 to RM6.49 as we incorporate Fortis’ operation post-completion of the 31% stake acquisition, which we believe should be positive in the long run. We forecast a 3-year core earnings CAGR of 15% and maintain our BUY rating on IHH. We find the valuation attractive as the stock is trading at - 1SD below its 5-year forward PER and EV/EBITDA mean. Downside risks: currency risk, higher-than-expected start-up expense and execution risk.

Source: Affin Hwang Research - 19 Apr 2019