IHH’s 2019 results were within our expectations. The group’s core net profit rose 8% yoy to RM1.0bn in 2019, underpinned by organic growth from its existing operations, the continuous ramp up of its young hospital as well as contributions from newly-acquired hospitals and increased capacity at existing hospitals. Nevertheless, we trim our 2020-21E earnings forecast by 4-5% to factor in negative impact from the Covid-19 outbreak. In spite of the earnings cut, we raise our TP to RM6.50 after applying a lower discount rate. We believe the stock deserves a premium valuation as one of the leading private healthcare providers with growing operations in countries where healthcare demand is still underserved. Maintain BUY.

4Q19 Dragged by Higher Start-up Losses and Interest Expenses

4Q19 revenue grew 21% yoy, mainly driven by: i) organic growth from existing operations (5-15% revenue growth across its key markets ex-India & North Asia), ii) continuous ramp-up of its young hospitals, and iii) contribution from newly-acquired hospitals and increased capacity at existing hospitals. Despite the strong revenue growth, its core net profit declined 13% yoy in 4Q19 due to start-up losses from the newly opened Gleneagles Chengdu and higher net interest expenses as additional borrowings were taken for Fortis acquisition. The results were within our expectations but above consensus.

Operational Metrics Remain Healthy

Inpatient admissions and revenue intensity were high across its key markets, except for India where its revenue intensity declined 6% yoy due to the inclusion of Fortis, which has lower revenue intensity vs. IHH’s existing operations in India. Fortis has recorded a fourth consecutive quarterly profit post-acquisition by IHH as a result of improved revenue and higher interest and cost savings. Nevertheless, GHK and Gleneagles Chengdu’s EBITDA losses widened to RM49m (4Q18: RM39m) and

Maintain BUY Call With a Higher TP of RM6.50

In view of the rising number of infection cases in markets where IHH operates in, especially Singapore, we expect the group to be impacted by the Covid-19 outbreak as 25% of its revenue from Singapore is derived from medical tourism. We lower our 2020-21E earnings forecast by 4-5% to account for lower medical tourism and delays in non-emergency treatments by patients amidst the Covid19 outbreak. Meanwhile, we raise our SOTP-derived TP to RM6.50 (from RM6.20) as we now incorporate a lower WACC of 7.1% (TG: 3%) for the group’s Parkway Pantai operations. Maintain BUY

Source: Affin Hwang Research - 2 Mar 2020