• 2QFY17 normalised earnings within expectations

• Normalised earnings marred by operating expenses of new hospitals

• Continued improvements recorded across all home markets

• Earnings forecasts maintained

• Maintain BUY with an unchanged TP of RM7.06 per share

Within expectations. IHH’s 2QFY17 normalised earnings came in at RM86.2m. This brings its 1H normalised earnings to RM288m which broadly met our and street’s earnings estimates. During the quarter, revenue increased by +12.5%yoy while PATANCI excluding exceptional items (EI) dipped by -54.1%yoy respectively. On a quarterly sequential basis, revenue was up by a marginal +3.2%qoq while earnings excluding EI declined by -57.3%qoq.

Normalised earnings marred by operating expenses of new hospitals. In 2QFY17, the year-over-year increase in revenue was mainly premised on: (i) healthy inpatient admissions numbers and revenue per inpatient; (ii) contribution from the ramp up of new hospitals; (iii) contribution from Gleneagles Hong Kong and Acibadem Altunizade; as well as (iv) contribution from the newly acquired hospitals in India and Bulgaria. However, IHH’s normalised earnings were 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 start-up losses of RM67.8m due to the pre-opening of Gleneagles Hong Kong which began operation back in March 2017.

Continued improvement recorded across all home markets.

Inpatient admissions grew in all markets by +1.3%, +4.8%, +15.2% and +40.4% 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 +8.7%, +10.3%, +0.7% 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.

Earnings forecast. Despite its 1H17 earnings making up only 32% of our full-year earnings estimates, as mentioned in our latest update report, we are expecting 2H earnings to come in stronger as both Gleneagles Hong Kong as well as Acibadem Altunizade ramp up their respective operations via the gradual openings of new specialization wards as well as accepting more high revenue intensities cases. Therefore, we are maintaining our earnings forecasts for FY17F for now as we believe the higher contribution from the upcoming quarters will offset the incremental depreciation and amortisation costs from the opening of Gleneagles Hong Kong and Acibadem Altunizade.

Maintain BUY. All in, we are reiterating our BUY recommendation on IHH with an unchanged DCF-based TP of RM7.06 per share (TG: 4.5%, WACC: 9.0%). We continue to 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.

Source: MIDF Research - 24 Aug 2017