1Q19 Core Net Profit of RM188.4m (+56% YoY; -45% QoQ) came in within expectations at 18% each of our and consensus full-year forecasts due to the seasonally slow first quarter. We lowered our EV/EBITDA multiple in Acibadem and Parkway Pantai due to the uncertain Turkey Lira and tough operating environment. Our TP is also lowered, from RM5.15 to RM4.90, based on SoP valuation. Reiterate UP due to tough operating environment and concerns over issues in Fortis.

1Q19 Core Net Profit of RM188.4m (+56% YoY; -45% QoQ) came in within expectations at 18% each of our/consensus full-year forecasts. We expect subsequent quarter's earnings to ramp up, from the seasonally slow 1Q19 in Acibadem. No dividend was declared as expected.

Key results’ highlights. QoQ, 1Q19 revenue and EBITDA rose 15% and 12%, respectively, mainly due to Fortis’ full three-month’s contribution, which included a one-off RM28.5m trustee management fee income from RHT relating to disposal of RHT assets. The increase in EBITDA was also due to the adoption of MFRS 16. 1Q19 core PATAMI decreased 44.8% due to the high base in 4Q18 where the Group recorded foreign exchange gain of RM44.7m mainly arising from the stronger USD on its USD-denominated cash balances and RM56.7m writeback of over-provision of prior year tax in 4Q18.

YoY, 1Q19 revenue and EBITDA increased 28% and 34%, respectively, due to improvement on organic growth at existing operations and contribution from Gleneagles Hong Kong Hospital and Acibadem Altunizade Hospital. Amanjaya Specialist Centre and Fortis Healthcare also contributed to the higher revenue and EBITDA. The Group’s revenue included a one-off RM28.5m trustee management fee income from RHT relating to its sale of RHT assets. Overall, revenue per inpatient increased across the board, including Singapore (+7%), Malaysia (+7.5%), and Acibadem (+27%). Headline PATAMI for 1Q19 rose 56% to RM89.5m. Core PATAMI excluding exchange loss on borrowings (RM127.2m) and share of loss of associate-RHT (RM28.9m) rose 56% to RM188.4m as a result of stronger operational performance, narrower losses at Gleneagles Hong Kong, and boosted by foreign exchange gains of RM67.9m.

Outlook. The group has pared down US$250m equivalent of non-Lira debt for Acibadem in April as part of on-going plan to reduce the exposure to Turkish Lira’s volatility. 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.

Maintain UP. We roll forward our valuation from FY19E to FY20E and attached a lower EV/EBITDA multiple for both operating units, i.e. Acibadem and Parkway Pantai due to the uncertain Turkey Lira and tough operating environment. We downgrade our TP from RM5.15 to RM4.90 based on SoP valuation, implying 41x FY19 EPS (-1.0SD below 5-year historical forward mean).

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

Source: Kenanga Research - 31 May 2019