1Q18 core net profit of RM120.5m (-40.3% YoY) came in below expectations at 15%/12% of our/consensus full-year forecasts. The negative variance from our forecast is due to higher-than-expected losses at newly start-up hospitals. Hence, we cut our FY18E/FY19E NP by 6%/5%. We roll forward our valuation from FY18E to FY19E with TP raised from RM4.90 to RM5.10 based on SoP. Reiterate UNDERPERFORM.

1Q18 missed expectations, 5th consecutive quarterly earnings disappointment. 1Q18 core net profit of RM120.9m came in below expectations at 15%/12% of our/consensus full-year forecasts. The negative variance from our forecast is due to higher-than-expected losses at newly start-up hospitals. This quarter marked the fifth consecutive quarterly earnings disappointment. No dividend was declared in this quarter as expected.

Key Result Highlights. YoY, revenue increased 6% to RM2.9b on sustained organic growth from existing operations and contribution from two new hospitals namely Gleneagles Hong Kong Hospital and Acibadem Altunizade Hospital, which opened in 2017. EBITDA grew 8% to RM608.9m due to narrowing losses at Gleneagles Hong Kong Hospital to RM46.6m from RM81.1m in 1Q17 due to gradual ramp-up. YoY, 1Q18 reported PATAMI falling 88% to RM57.2m against a high base in 1Q17 which was due to a one-off gain from the Apollo Hospitals divestment (RM313.4m). Excluding forex losses from USD- denominated debt (RM160m), 1Q18 core PATAMI fell 40% to RM120.5m dragged down by higher depreciation, amortisation and finance costs from the new hospitals opened in 2017.

QoQ, 1Q18 revenue and EBITDA fell 1% due to the depreciation of SGD and TL against MYR. QoQ, 1Q18 PATAMI excluding foreign exchange losses of RM103.9m as compared to RM18.2m in 4Q17 decreased 33.8% due to start-up losses at Gleneagles Hong Kong (RM46.6m) in 1Q18 albeit narrowing from RM65.3m in 4Q17. The foreign exchanges losses arose from the effects of a weakening USD on the Group’s USD-denominated cash balances.

Outlook. Separately, IHH has extended the Fortis offer to 30 June 2018 to enable the reconstituted Board of Fortis to fully consider and evaluate the enhanced proposal (please refer to our note date 3 May 2018 titled ‘Offer For Fortis Sweetened’). We believe IHH still stands a chance following TPG Capital-backed Manipal Health Enterprises which has extended the validity of its revised offer to buy Fortis Healthcare Ltd, suggesting that the offer is still open for India’s second-largest hospital chain. However, over the short-to-medium term, IHH is expected to face higher costs of operations arising from wage inflation as a result of increased competition for trained personnel and start-up costs on pre-opening of hospitals, including Gleneagles Hong Kong (GHK) which will put pressure on cost and margins.

Downgrade FY18E/FY19E net profit by 6%/5%. We cut our FY18E/FY19E net profit forecasts by 6%/5% to take into account higher-than-expected losses at newly start-up hospitals.

Maintain UNDERPERFORM. Apart from our earnings downgrade, we roll forward our valuation from FY18E to FY19E. Our TP is raised slightly from RM4.90 to RM5.10 based on sum-of-parts valuation.

Key risk to our call: faster-than-expected ramp up in new hospitals.

Source: Kenanga Research - 28 May 2018