FY19 Core Net Profit (CNP) of RM921m (-10% YoY) came in within expectations at 95%/100% of our/consensus full-year forecasts. 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 against USD with continued volatility, and (ii) execution risk at Fortis as well as uncertainty over its timeline in terms of a turnaround to profitability. SoP-TP is RM4.70. Reiterate UP.

Key results’ highlights. QoQ, 4QFY19 revenue grew 1% due to lower contribution from Parkway (-1.1%) despite higher Acibadem (+8%) contribution. EBITDA increased 9% largely driven by Acibadem (+33%) which more than offset a flat Parkway (+1%). Overall inpatient admission were a mixed bag led by Acibadem (12%) but lower Singapore (-2%), Malaysia (-1%) and India (-6%) operations. Similarly, QoQ revenue per inpatient were higher in Singapore (+2%) and Malaysia (+3%) but lower in Acibadem (-2%). This brings 4QFY19 CNP higher by 44% due to higher associates (>100%). A 1st and final DPS of 4.0 was declared which came in within expectation.

YoY, FY19 revenue and EBITDA increased 29% and 34%, respectively, underpinned by sustained organic growth from existing operations and the continuous ramp-up of Gleneagles Hong Kong Hospital (decreasing start-up losses, from RM178.1m in FY18 to RM156.7m FY19) and Acibadem Altunizade as well as contribution from Acibadem Maslak. The acquisition of Amanjaya in Oct 2018, and Fortis in Nov 2018 also bolstered FY19 revenue and EBITDA. The adoption of MFRS 16 also boosted FY19 EBITDA since the group does not recognise operating lease expense but instead recognised depreciation on the right-of-use assets. However, FY19 CNP fell 10% due to widening losses at India operation (widened from RM112m in FY18 to RM284m in FY19).

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. TP is RM4.70 based on SoP valuation, implying 39x FY20E EPS (-1.5SD below 5-year historical forward mean). The stock is trading at rich valuations of 49x and 47x on FY20E and FY21E EPS, respectively, compared to growth averaging 8% each over the next two years.

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

Source: Kenanga Research - 2 Mar 2020