3Q19: Solid Performance

IHH reported a stronger revenue (+33% yoy) and core net profit (+23% yoy) in 3Q19. 9M19 core net profit of RM780m came in within our expectations at 71% of full year forecast, but above consensus at 80%. Positive takeaways from 3Q19 results include narrowed start-up losses from GHK, third consecutive quarter of profit recorded by Fortis and positive progress on its debt restructuring which resulted in a significant reduction of the impact of forex volatility to the group’s earnings. We maintain our BUY call on IHH with an unchanged TP of RM6.40.

Strong Revenue and Core Net Profit Growth

3Q19 revenue grew 33% yoy, mainly driven by: i) organic growth from existing operations (11-27% revenue growth across its key markets ex-India & Acibadem), ii) continuous ramp-up of Gleneagles Hong Kong Hospital (GHK) and Acibadem Altunizade Hospital which opened in March 2017, iii) contribution from the increased capacity at Acibadem Maslak Hospital which the expansion completed in October 2018, and iii) contribution from Fortis Healthcare (which boosted IHH’s Indian operations by more than fivefold). Stripping off the exceptional items, IHH’s core net profit grew 23% yoy in 3Q19 in line with its strong revenue growth.

Operational Metrics Remain Healthy

Inpatient admissions and revenue intensity were high across its key markets, with the exception of i) India (revenue intensity -21% 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 -6%, due to fewer local patients at its non-Istanbul hospitals). Its 31%-owned Fortis has recorded a third consecutive quarterly profit post-acquisition by IHH as a result of higher revenue, cost saving initiatives undertaken, and lower interest cost.

Maintain BUY With An Unchanged TP of RM6.40

We maintain our earnings estimates and BUY call on IHH with an unchanged DCF-based TP of RM6.40. Going forward, we believe that IHH should continue to deliver stronger earnings, underpinned by i) organic growth from existing operations on the back of the increased use of medical services with ageing demographics, rising affluence, rise in non-communicable diseases and growing medical tourism, ii) narrowing losses from GHK as a result of operating leverage, and iii) improvement in Fortis’ profitability as the group continues working with the Fortis team on operational synergies, which should offset the start-up costs of its new Gleneagles Chengdu Hospital. Downside risks: currency risk, higher-than-expected start-up expense from new hospitals, and potential new pricing controls in key markets.

Source: Affin Hwang Research - 2 Dec 2019