IHH’s 2Q19 revenue grew by 37% yoy but core net profit declined by 6% yoy on higher finance costs. The results were broadly within expectations. Positive takeaways from 2Q19 results include narrowed losses from GHK, second consecutive quarter of profit recorded by Fortis and lower forex losses on Acibadem’s non-Lira debt. We maintain our BUY call with an unchanged TP of RM6.40.

Weighed Down by Higher Finance Costs

2Q19 revenue grew 37% yoy, mainly driven by: i) organic growth of its existing operations (12-22% revenue growth across its key markets ex-India), ii) continuous ramp-up of Gleneagles Hong Kong (GHK) and Acibadem Altunizade hospitals, and iii) contributions from Fortis Healthcare (which boosted IHH’s Indian operations by fivefold). Nonetheless, core net profit declined 6% yoy, mainly hampered by higher finance costs. While only comprising 41% and 39% of market-consensus and our full-year estimates, respectively, we deem the results as broadly within expectations (6M18 core net profit was only 37% of 2018).

Core Markets Holding Up Well

Inpatient admissions and revenue intensity were high across its key markets, with the exception of i) India (revenue intensity -15% yoy, due to the inclusion of Fortis which has lower revenue intensity as compared to IHH’s existing operations in India); and ii) Acibadem (inpatient volume -5%, due to fewer local patients at its non-Istanbul hospitals). Notably, its 31%-owned Fortis has recorded a second consecutive quarterly profit post-acquisition by IHH as a result of higher revenue, cost saving initiatives undertaken, and lower interest cost. Meanwhile, GHK continues to record narrowed start-up losses yoy to RM35m in 2Q19 (2Q18: RM43m), though similar to 1Q19 due to seasonality factor as the doctors usually go on vacation in the month of June. For new hospital expansion, Gleneagles Chengdu and Gleneagles Shanghai are on track to open in late 2019E and late 2020E respectively.

Acibadem’s Debt Restructuring Showed Positive Results

The forex losses on translation of Acibadem’s non-Lira debt has narrowed significantly by 58% yoy to RM80m in 2Q19 as a result of the repayment of US$250m equivalent of non-Lira debt in April 2019. Acibadem refinanced US$170m equivalent of non-Lira debt and has swapped part of it into Lira debt in July 2019. This is far ahead of its schedule to further reduce the impact of forex volatility to the group’s earnings (previous target: by 2020E), bringing down its non-Lira debt exposure to below US$300m.

Source: Affin Hwang Research - 3 Sept 2019