9MFY19 Core Net Profit (CNP) of RM631m (-8% YoY) came in below expectations at 61%/65% of our/consensus fullyear forecasts. This quarter marked the third consecutive quarterly earnings disappointment. The variance from our forecast was due to lower-than-expected contribution from Acibadem. We cut our FY19E/FY20E net profit forecasts by 6%/7%. TP is lowered, from RM4.85 to RM4.70, based on SoP valuation. Reiterate UP.

Key results’ highlights. QoQ, 3QFY19 revenue grew 4% from a low as a result of Ramadan and Eid Holiday in 2QFY19. EBITDA increased 7% largely driven by Malaysia (+21%) which more than offset a surprisingly flat Acibadem (-0.4%) whereby historically the latter usually booked in the strongest quarter. Overall inpatient admission increased across the board led by Malaysia (+10%), India (+10%), Singapore (2%) which more than offset a 2nd consecutive quarterly weaker Acibadem (-5%). This brings 3QFY19 CNP lower by 16% due mainly to higher net interest expenses, foreign exchange losses and higher fair value losses on forward exchange contracts. Overall, QoQ revenue per inpatient increased across the board, including Singapore (+1%), Malaysia (+3%), and Acibadem (+9%). No dividend was declared as expected.

YoY, 9MFY19 revenue and EBITDA increased 33% and 38%, respectively, underpinned by sustained organic growth from existing operations and the continuous ramp-up of Gleneagles Hong Kong Hospital (losses decreased from RM139m in 9MFY18 to RM107m in 9MFY19) and Acibadem Altunizade as well as contribution from Acibadem Maslak. The acquisition of Amanjaya in Oct 2018, and Fortis in Nov 2018 also bolstered both 9MFY19 revenue and EBITDA. The adoption of MFRS 16 also boosted 9MFY19 EBITDA since the group does not recognise operating lease expense but instead recognised depreciation on the right-of-use assets. However, 9MFY19 CNP fell 8% on higher net interest expenses as additional loans were taken for acquisition, working capital and conversion of Euro to Turkey Lira interest but this was partially cushioned by the reversal of RM21.8m accrued interest for prior years’ tax payable. 9MFY19 net debt is RM4.4bn vs RM900m in 9MFY18. Overall, revenue per inpatient increased across the board, including Singapore (+5%), Malaysia (+6%), and Acibadem (+23%). However, Parkway Pantai’s India hospital’s revenue per inpatient admission decreased 19% as Fortis’ revenue intensity is generally lower than Parkway Pantai’s existing operations in India. As such, India losses continued to widen, to RM80m compared to RM27m in 9MFY18.

Outlook. Looking at IHH’s performance in 62%-owned Continental Hospitals and 74%-owned Global Hospitals acquired back in 2015 where EBITDA is hardly positive, India is seen as a tough operating environment. We are concerned over issues at Fortis, including an auditor’s qualified audit report in FY18, potential risk of provisions, lapses in internal controls, leading 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 downgrade FY19E/FY20E net profit by 6%/7% to take into account of lower contribution from Acibadem. Correspondingly, we downgrade our TP from RM4.85 to RM4.70 based on SoP valuation, implying 39x FY20E EPS (-1.5SD below 5-year historical forward mean). Key risk to our call is faster-than-expected ramp-up in new hospitals.

Source: Kenanga Research - 2 Dec 2019