INVESTMENT HIGHLIGHTS

• 1Q17 earnings within expectations

• Normalised earnings marred by pre-operating expenses of new hospitals

• Continued improvements recorded across all home markets

• Earnings forecasts maintained

• Maintain NEUTRAL with an unchanged TP of RM6.58

Within expectations. IHH’s 1QFY17 normalised earnings came in at RM201.8m which broadly met our and street’s earnings estimates. During the quarter, revenue increased by +8.5%yoy while PATANCI excluding exceptional items (EI) dipped by -15.3%yoy respectively. On a quarterly sequential basis, revenue was up by a marginal +2.0%qoq while earnings excluding EI declined by -9.3%qoq.

Normalised earnings marred by pre-operating expenses of new hospitals. In 1QFY17, the year-over-year increase in revenue was mainly premised on increased contribution from existing hospitals, continued ramp up of new hospitals opened back in 2015 as well as contribution from the newly acquired hospitals in India and Bulgaria. However, IHH’s normalised earnings or earnings excluding a gain of RM313.4m from the disposal of 6.07% stake in Apollo Hospitals in India, was lower during the quarter due to incremental depreciation, amortisation and finance costs for both hospitals in Hong Kong and Istanbul. In addition, IHH also continued to incur pre-operating expenses of RM81.1m and RM5.2m due to the pre-opening of Gleneagles Hong Kong as well as Acibadem Altunizade; both began operations back in March 2017.

Continued improvement recorded across all home markets.

Inpatient admissions grew in all markets by +4.1%, +3.1%, +14.1% and +33.7% in Singapore, Malaysia, India and Acibadem year-overyear respectively. The surge in inpatient admission in Acibadem is due the admissions into the Bulgarian hospitals (revenue and earnings booked under Acibadem). As for revenue per inpatient, all its home markets recorded an increase of +2.9%, +10.8%, +3.1% and +4.0% year-over-year espectively. This can be attributed to the increase in complex cases undertaken by the hospitals as well as price adjustment due to inflation.

Earnings forecast. We are maintaining our earnings forecasts for FY17F for now as we believe the following quarters will show stronger earnings due to the incorporation of revenue from the recently opened Gleneagles Hong Kong. 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 think 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 0.20x and cash position of RM2.8b will continue to ensure the prospects of the company remains intact.

Source: MIDF Research - 22 May 2017