9M18 core net profit of RM686m (+66% YoY) came in above expectations at 89%/89 of our/consensus full-year forecasts. Since our contrarian sell call, the stock has fallen 30%. We downgrade our TP from RM5.10 to RM4.60 based on SoP due to the enlarged share base following the additional acquisition of Acibadem and factoring in Fortis. Reiterate UNDERPERFORM.

9M18 core net profit of RM686m (+66% YoY) came in above expectations at 89%/89 of our/consensus full-year forecasts. The positive variance from our results was due to higher-than-expected inpatient volume. No dividend was declared in this quarter as expected.

Key Result Highlights. QoQ, 3Q18 revenue (+7%) and EBITDA (+17%) rose as a result of Hari Raya and Eid holidays in Q2 2018. 3Q18 PATAMI excluding EI increased 23% QoQ on the back of the EBITDA growth and the recognition of higher fair value gain on financial instruments in 3Q18, which was partially eroded by the higher net financing costs due to the depreciation of TL against USD and Euro arising from the Group’s USD and Euro borrowings, and lower exchange gain recognised in 3Q18 on the Group’s USD-denominated cash balances.

YoY, 9M18 revenue increased 1% to RM8.4b while EBITDA was up 5% YoY to RM1.8b as a result of the sustained organic growth from existing operations and the continuous ramp up of the two hospitals opened in March 2017. Stripping out the translational effects of a stronger Malaysian Ringgit, revenue and EBITDA growth rates were 16% and 17%, respectively. Reported PATAMI was RM118.3m (-86.4%) due to recognition of foreign exchange losses on Acibadem Holding’s non- Turkish Lira denominated borrowings. Core PATAMI (excluding exceptional items) increased 66% to RM686m as a result of the low base in YTD 2017 where the Group accrued RM22.5m interest expenses for capital gains tax payable and RM17.7m additional tax provision relating to prior-year’s tax.

Outlook. Looking ahead, over the medium term, IHH is expected to face tough operating conditions on the back of: (i) uncertain Turkish Lira, which 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, (ii) execution risk at Fortis and uncertainty over its timeline in terms of a turnaround in profitability, and (iii) 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. Parkway Pantai will continue to focus on ramping up existing operations and integrating Fortis in the short to medium term.

Upgrade FY18E/FY19E net profit by 13%/6% taking into account of the better-than-expected performance.

Maintain UP and fine tuning our TP due to the acquisition of additional stakes in Acibadem and completion of acquisition of 31.1% stake in Fortis. Recall, IHH has raised its stake in its Turkish subsidiary Acibadem to 90% from 60% following the conversion of 15% stake held by Mr. Aydinlar and Khazanah Bhd, respectively, in Acibadem into IHH shares. We downgrade our TP from RM5.10 to RM4.60 based on SoP.

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

Source: Kenanga Research - 28 Nov 2018