• Organic growth in home markets to continue

• Aggressive expansion plans to bear fruit

• Robust balance sheet

• RM3.3b in war chest to assist future growth

• Upgrade to BUY with a revised TP of RM7.06 per share

Organic growth in home markets to continue. IHH Healthcare continues to see organic growth in its home markets despite the ongoing aggressive expansion it is currently undertaking. In 1QFY17, year-over-year inpatient admissions grew in all markets by +4.1%, +3.1%, +14.1% and +33.7% in Singapore, Malaysia, India and Acibadem respectively. As for revenue per inpatient, all of its home markets recorded an increase of +2.9%, +10.8%, +3.1% and +4.0% year-over-year respectively. This can be attributed to the increase in complex cases undertaken by the hospitals as well as price adjustment due to inflation. Note that the increase in both admissions as well as revenue is despite the persistent soft consumer sentiment in most of the home markets.

Aggressive expansion plans to bear fruit. First quarter of 2017 saw the opening of two new hospitals i.e Gleneagles Hong Kong as well as Acibadem Altunizade with the capacity of 500 and 350 beds respectively. In late FY18, IHH is slated to open the 350-beded Gleneagles Chengdu in China. Despite still incurring pre-operating expenses on these two hospitals, we opine that earnings will start to strengthen in the 2HFY17 as the hospitals are expected to receive more patients and more complex cases with further openings of new specialization wards. This in return will offset the depreciation and amortisation costs associated with the opening of the two hospitals.

Robust balance sheet. IHH’s total debt excluding PLife REIT amounts to about RM5.5b as of the first quarter of this year. Despite the amount, IHH’s balance sheet remains robust with its net gearing ratio recorded at 0.2x against its current cash balance of about RM2.8b. Furthermore, we think that its balance sheet is further secured via natural hedge as most of the borrowings are in the currency of its home markets.

RM3.3b in war chest to assist future growth. IHH ended its first quarter of 2017 with a cash balance of RM2.8b. However, this will increase to RM3.3b as a result of the disposal of its 10.68% stake in India’s Apollo Hospitals worth RM556m. We opine that IHH will use this cash balances for potential future acquisitions which is inline with its expansion strategy.

2QFY17 earnings to be hit by further depreciation and amortisation cost. That said, IHH’s 2QFY17 earnings which will be announced on the upcoming 23 of August will continue to be hit by high depreciation and amortisation cost from the recently opened Gleneagles Hong Kong and Acibadem Altunizade. We believe its 2QFY17 earnings will come in between RM200-210m which is flat on a quarter-over-quarter basis but higher against the corresponding quarter last year. However, we are expecting its earnings to recover in the 2HFY17 as both hospitals gradually ramp up operations and accepting more complex cases which will offset the depreciation and amortisation costs going forward.

Earnings forecasts reduced for FY17F but stronger earnings expected from FY18 onwards. As we are expecting IHH’s earnings to be flat in 2QFY17, we have reduced our FY17F earnings by -23.8% due to the expected increase in depreciation and amortisation cost by +20% arising from the opening of Gleneagles Hong Kong and Acibadem Altunizade this year. This is also due to the gradual ramp up of the specialization ward as well as gradual acceptance of critical cases at both hospitals this year which will cause a temporary mismatch in terms of revenue and costs. We are however, expecting FY18F earnings to expand by +30.7%yoy as we anticipate: (i) better revenue recognition from the two new hospitals; (ii) lower depreciation and amortisation cost from FY18 onwards and; (iii) more meaningful contribution from its operations in Turkey as Acibadem has finally passed its CAPEX-intensive period.

Recommendation. As we are expecting stronger earnings from FY18 onwards for IHH, we are upgrading our recommendation on IHH to a BUY (from Neutral previously) with a revised TP of RM7.06 per share (from RM6.58 per share previously) which is a +19.7% upside from its current price. Our TP is derived via DCF with an unchanged terminal growth of 4.5% and WACC of 9.0%. We believe that the resilient demand and growth for healthcare services across all its home markets will continue to drive its earnings growth going forward coupled with the increase in contribution from its newly opened hospitals. 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 RM3.3b will continue to ensure the prospects of the company remains intact. Furthermore, we opine that IHH’s current share price presents buying opportunities given that the share price has been depressed to levels last seen since October 2015. We believe that the share price should be trading at higher levels of about RM6.50-RM7.00, before the recent sell down on the stock given its strong fundamentals.

Source: MIDF Research - 4 Aug 2017