• 4Q16 earnings within expectations

• Headline earnings marred by operational one-offs

• Improvements across all home markets

• First and final dividend of 3sen declared for FY16

• Maintain NEUTRAL with a revised TP of RM6.58 per share

Within expectations. IHH’s 4QFY16 normalised earnings came in at RM222.4m. This brings its FY16 normalised earnings to RM866m, which met our estimates but missed consensus earnings forecasts. Revenue and PATANCI excluding exceptional items (EI) increased by +14.7%yoy and +3.6%yoy respectively. On a quarterly sequential basis, revenue was up by +7.8%qoq while earnings excluding EI increased by +2.2%qoq. A first and final interim dividend of 3.0sen was also declared for the quarter under review. This translates to a yield of 0.5% to yesterday’s closing price.

Reported earnings marred by operational one-offs. In 4QFY16, the year-over-year increase in revenue was mainly premised on increased contribution from existing hospitals, new hospitals as well as newly acquired hospitals in India and Bulgaria. However, reported earnings for the quarter were marred by a several operational one-offs such as: (i) the increase in provision for doubtful debts by +RM50.8m with regards to receivables from Libyan patients in Acibadem hospitals and; (ii) unrealised forex losses of RM244.6m with regards to its nonTurkish Lira borrowings. In addition, IHH also continues to incur preoperating expenses due to the pre-opening of Gleneagles Hong Kong slated to open this quarter by about ~RM38m and start-up losses for new hospitals. So far, 400 nurses as well as around 50 doctors have been recruited for the hospital.

Improvement across all home markets. Inpatient admissions grew year-over-year in all markets by +4.8%, +3.6%, +7.7% and +46.8% in Singapore, Malaysia, India and Acibadem (operating in various countries) respectively. The sudden surge in inpatient admissions in Acibadem is due the admissions into the Bulgarian hospitals (revenue and earnings booked under Acibadem). As for revenue per inpatient, Singapore, Malaysia and India recorded an increase of +1.5%, +12.3% and +15.5% respectively. This can be attributed to the increase in complex cases undertaken by the hospitals as well as price adjustments due to inflation.However, revenue per inpatient in Acibadem experienced a contraction of -7.6% respectively due to increase in local patient admissions which tend to generate lower revenue.

Earnings forecast. We are maintaining our earnings forecasts for FY17F for now and we introduce our FY18F numbers in this report. Key risks to our earnings are: (i) volatility in the currency market; (ii) lower than expected inpatient admissions and revenue per patient and; (iii) increasing cost of operations in its key home markets.

Maintain NEUTRAL. We are maintaining our NEUTRAL recommendation on IHH with an unchanged DCF-based TP of RM6.58 per share (TG: 4.5%, WACC: 9.0%). We believe that despite the resilient demand and growth for healthcare services across all its home markets, we remain wary of 2017 as challenges persist. This is due to the continuous increase in: (i) operating costs; (ii) cost of living in its home markets as well as; (iii) inflation in wages of personnel. This is coupled with the volatile movement of the currency exchange which might pose a risk of exchange loss on its borrowings. That said, we continue to be long term positive on IHH’s fundamentals as its robust balance sheet with a gearing ratio of 0.21x and cash position of RM2.4b will continue to ensure that the prospects of the company remains intact.

Source: MIDF Research - 24 Feb 2017