FY18 core net profit of RM1,027m (+73% YoY) came in above expectations at 120%/136% of our/consensus fullyear forecasts. The positive variance from our forecast was due to higher-than-expected revenue per inpatient which prompted us to upgrade our FY19E CNP by 15%. Our TP is raised from RM4.60 to RM5.15 based on SoP valuation. Reiterate UP due to tough operating environment and concerns over issues in Fortis.

FY18 core net profit of RM1,027m (+73% YoY) came in above expectations at 120%/136% of our/consensus full-year forecasts. The positive variance from our forecast was due to higher-thanexpected revenue per inpatient. A 1st and final DPS of 3.0 sen was proposed, which is in line with our expectation.

Key Result Highlights. QoQ, 4Q18 revenue (+11%) and EBITDA (+17%) rebounded from the typically slow 3Q18 due to the summer months in Turkey and further boosted by Amanjaya and Fortis since their acquisitions during 4Q18. Overall, revenue per inpatient increased across the board, including Singapore (+1.4%), Malaysia (+0.4%) and Acibadem (+4.2%). This brings 4Q18 PATAMI excluding one-off higher 11% QoQ mainly due to the RM37.1m fair value loss of financial derivatives recognised in 4Q18 as compared to RM48.4m fair value gain recognised in 3Q18, and write-back of prior year tax provisions in 4Q18.

YoY, FY18 revenue increased 3% to RM11.5bn while EBITDA was up 9% to RM2.5bn attributed to the sustained organic growth from existing operations and the continuous ramp-up of the two hospitals opened in March 2017. Amanjaya and Fortis also contributed to the increase in the Group’s revenue and EBITDA. Overall, revenue per inpatient increased across the board including Singapore (+7.7%), Malaysia (+6.1%), and Acibadem (+24.4%). Headline FY18 PATMI was RM627.7m (-35%) mainly due to higher net forex losses for Acibadem’s non-Lira loans, and against a high base in FY 2017 that included a oneoff gain from the disposal of its stake in Apollo Hospitals. Core PATAMI excluding exchange loss on borrowings (RM644.1m) and revaluation gain (RM50.4m) increased 73% as a result of stronger operational performance, narrower losses at Gleneagles Hong Kong, and boosted by foreign exchange gains of RM67.9m mainly arising from the stronger USD on the Group’s USD-denominated cash balances.

Outlook. However, we are concerned over issues at Fortis, including an auditor’s qualified audit report in FY18, which has been carried forward into the quarterly review on 13 Feb 2019, risk of more provisions, lapses in internal controls, which led to regulatory probing, which could well mean execution risk. Looking ahead, over the medium term, IHH is expected to face tough operating conditions on the back of: (i) the uncertain Turkish Lira which has depreciated significantly against USD, Euro and MYR with continued volatility, and (ii) execution risk at Fortis as well as uncertainty over its timeline in terms of a turnaround to profitability.

Upgrade FY19E net profits by 15% taking into account the betterthan-expected performance by factoring in higher revenue per inpatient.

Maintain UP, TP raised to RM5.15. We upgrade our TP from RM4.60 to RM5.15 based on SoP valuation.

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

Source: Kenanga Research - 28 Feb 2019