1H19 Core Net Profit of RM428.5m (+14% YoY) came in below expectations at 41/40% of our/consensus full-year forecasts. The variance from our forecast was due to lowerthan-expected contribution from Acibadem. As such, we cut our FY19E/FY20E net profit forecasts by 2%/3%. Our TP is also lowered, from RM4.90 to RM4.85, based on SoP valuation. Reiterate UP due to tough operating environment and concerns over issues in Fortis.

1H19 Core Net Profit of RM428.5m (+14% YoY) came in below expectations at 41/40% of our/consensus full-year forecasts. The variance from our forecast was due to lower-than-expected contribution from Acibadem. No dividend was declared as expected.

Key results’ highlights. QoQ, 2Q19 revenue was flat QoQ while EBITDA fell 5% due to the high base effect in 1Q19 due to a one-off RM28.5m trustee management fee income from RHT relating to disposal of RHT assets. However, 2Q19 Core Net Profit (CNP) rose 27% from a low base in 1Q19 where the Group recorded forex loss (RM12.6m) in 1Q19 as compared to a forex gain (RM10.7m) in 2Q19. Overall, QoQ revenue per inpatient increased across the board, including Singapore (+1%), Malaysia (+3%), and Acibadem (+9%) which more than offset a 1% rise in inpatient admission.

YoY, 1H19 revenue and EBITDA increased 32% and 40%, respectively, underpinned by sustained organic growth from existing operations and the continuous ramp-up of Gleneagles Hong Kong Hospital and Acibadem Altunizade Hospital. The adoption of MFRS 16, also boosted the 1H19 EBITDA since the Group does not recognise operating lease expense but instead recognised depreciation on the right-of-use assets. 1H19 CNP rose 14% on stronger operational performance and boosted by narrower start-up losses at Gleneagles Hong Kong, which decreased from RM89.3m in 1H18 to RM67.8m in 1H19, as a result of better operating leverage. Overall, revenue per inpatient increased across the board, including Singapore (+5%), Malaysia (+7%), and Acibadem (+28%). However, Parkway Pantai’s India hospitals revenue per inpatient admission decreased 16% as Fortis’ revenue intensity is generally lower than Parkway Pantai’s existing operations in India. As such, India losses continued to widen, to RM134m compared to RM19.6m in 1H18.

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. The remaining balance of US$300m is expected to be pared down sometime in 2020. We are concerned over issues at Fortis, including an auditor’s qualified audit report in FY18, 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.

We downgrade FY19E/FY20E net profit by 2%/3% to take into account of lower contribution from Acibadem.

Maintain UP. Correspondingly, we downgrade our TP from RM4.90 to RM4.85 based on SoP valuation, implying 38x FY20E EPS (-1.5SD below 5-year historical forward mean).

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

Source: Kenanga Research - 3 Sept 2019