1Q17 core net profit of RM201m (-15% YoY) came in below expectations at 19% of both our and consensus full-year forecasts. The negative variance from our forecast is due to higher-than-expected operating cost. We are conservatively cutting our FY17 and FY18 net profit forecasts by 6-8% to take into account of lower margins. Correspondingly our TP is reduced from RM5.42 to RM5.34 based on SoP as we roll forward our valuation from FY17E to FY18E. Reiterate UNDERPERFORM.

Key Result Highlights

QoQ, 1Q17 revenue increased 2% due to higher contribution from Parkway Pantai (+7%) but negated by lower Acibadem (-5%). EBITDA remained flat due to the ramp up of hiring and pre-operating costs in 1 to prepare Gleneagles Hong Kong Hospital and Acibadem Altunizade Hospital for their opening in March 2017. This brought 1Q17 core PATAMI lower by 9.3% excluding i) RM313m gains from divestment of Apollo Hospitals; and ii) RM94.1m exchange loss on net borrowings and dragged down by incremental depreciation, amortisation and finance costs with the opening of the 2 new hospitals in March 2017. No dividend was declared in this quarter as expected.

YoY, 1Q17 revenue grew 8% due to: (i) high intensities in patient volume and revenue of existing operations, and (ii) organic growth of existing operations and the continuous ramp up of the hospitals opened in 2015. However, EBITDA decreased by 8% mainly due to pre-operating and start-up costs from the Gleneagles Hong Kong Hospital and Acibadem Altunizade Hospital, both opened in March 2017. EBITDA also decreased as a result of higher operating and staff costs. The brings 1Q17 PATMI excluding gains from divestment of Apollo and exchange loss on borrowings came in lower by 15% to RM201.8m dragged down by incremental depreciation, amortisation and finance costs with the opening of 2 new hospitals in March 2017.

Outlook. Overall, over the short-to-medium term start-up costs on pre-opening of hospitals, including Gleneagles Hong Kong (GHK) which commenced operations in Mar 2017 are expected to put pressure on margins. Specifically, the oncology services expected to commence operations in 2H17 and are expected to incur additional cost. The operations of GHK have been gradually picking up with better utilisation of the operation theatres. On a separate note, in an announcement to Bursa Malaysia, IHH has disposed its remaining shareholdings in Apollo comprising 6,654,712 ordinary shares or 4.78% stake of INR5.00 each for a total cash consideration of INR8.198 billion (RM551.1m). Post Tranche 2, IMHHL has completed its divestment of 10.85% of the equity interest in Apollo. IHH is expected to register a gain of RM245.6m or 2.9 sen/share from this sale.

Downgrade FY17 and FY18 net profit by 6-8%. We are conservatively cutting our FY17 and FY18 net profit forecasts by 6- 8% to take into account of lower margins.

Maintain UNDERPERFORM. We roll forward our valuation from FY17E to FY18E. Correspondingly Our TP is reduced from RM5.42 to RM5.34 based on sum-of-parts.

Source: Kenanga Research - 22 May 2017