1H18 core net profit of RM377m (+30.9% YoY) came in within our expectation at 50% but below market at 43%, of full-year forecasts. This quarter marks the first quarter of earnings meeting our expectation after five consecutive disappointments. No changes to our FY18E/19E earnings. TP is RM5.10 based on SoP. Reiterate UNDERPERFORM.

1H18 core net profit of RM377m (+30.9% YoY) came in within our expectation at 49% but below market at 43%, of full-year forecasts. This quarter marks the first quarter of earnings meeting our expectation after five consecutive disappointments.

Key Result Highlights. QoQ, 2Q18 revenue (-7%) and EBITDA (-13%) was eroded by the strengthening RM against the currencies of the countries which the group operates. Excluding the effects of the strengthening RM on translation of the group’s results, QoQ, 2Q18 revenue increased 2%, whilst EBITDA decreased 7%. 2Q18 EBITDA was eroded by the higher cost of purchase and operating costs incurred in USD and EURO, which had strengthened. In addition, the group recognised expense relating to staff’s incentive and bonus plans in 2Q18. The group also recognised RM20.4m acquisition-related expenses during the quarter. Overall, inpatient admission intensities fall across the board, including Singapore (-1.7%), Malaysia (-4.5%), India (-4.9%) and Acibadem (-4.9%). This brings 2Q18 PATAMI excluding exceptional items, which increased 113% from a low base in 1Q18 of which the Group recognised RM103.9m in foreign exchange losses in 1Q18 as compared to RM77.1m foreign exchange gain recognised in 2Q18.

YoY, 1H18 revenue increased 1% YoY to RM5.5b while EBITDA rose 3% YoY to RM1.1b. Stripping out the translational effects of the stronger Ringgit, revenue and EBITDA grew 15% and 14%, respectively. This brings reported 1H18 PATAMI to RM222.3m (-72% YoY). However, excluding exceptional items, core PATAMI increased 31% to RM377m as a result of the low base in YTD 2017 where the Group accrued RM21.3m of interest expenses for capital gains tax payable and RM17.7m additional tax provision relating to prior-year’s tax.

Outlook. Looking ahead, over the short-to-medium term, IHH is expected to face higher operating costs 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. Since June 2018, the Turkish Lira has depreciated significantly against USD, Euro and MYR with continued volatility in the currency. This will result in foreign exchange translation losses on the Group’s balance sheet and income statement. Recall, IHH had won the bid to buy Fortis for INR170/share via a combination of fresh equity injection and secondary purchase from public shareholders for a cash consideration of RM2.3b-RM4.3b. The deal is positive because it propels IHH into a leading Pan-Indian hospital operator. However, we are concerned about execution risk at Fortis.

Maintain UNDERPERFORM. No changes to our FY18E/19E earnings. TP is RM5.10 based on SoP. Reiterate UNDERPERFORM.

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

Source: Kenanga Research - 29 Aug 2018