INVESTMENT HIGHLIGHTS

• 3QFY17 normalised earnings below expectations

• Normalised earnings marred by operating expenses of new hospitals

• Continuous improvements in main home markets

• Maintain BUY with a revised TP of RM6.91 per share

Below expectations. IHH’s 3QFY17 normalised earnings came in at RM125.4m. This brings its 9MFY17 normalised earnings to RM413.4m which is below our and consensus’ full-year earnings estimates. During the quarter, revenue increased by +14.7%yoy while PATANCI excluding exceptional items (EI) dipped by -42.4%yoy respectively. On a quarterly sequential basis, revenue was flat at +1.0%qoq while earnings excluding EI increased by +45.4%qoq.

Normalised earnings marred by operating expenses of new hospitals. In 3QFY17, 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 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 incurred a foreign currency translation loss on its borrowings of RM87.5m due to the weak Turkish Lira (TRY) which offset the stronger Singapore Dollar (SGD).

Continuous improvements in main home markets. Inpatient admissions grew in all markets by +1.1%, +18.4% and +15.7% in Singapore, India and Acibadem year-over-year respectively while Malaysia recorded a contraction of -2.2%yoy. 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 +11.9%, +13.9%, +2.1% and +19.1% 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. Post earnings announcement, we are revising down our FY17-18F earnings to RM649.2m and RM952.4m respectively as we input higher incremental depreciation and amortisation costs coming from the opening of Gleneagles Hong Kong and Acibadem Altunizade.

Maintain BUY. Post earnings revision, we are reiterating our BUY recommendation on IHH with a lower DCF-based TP of RM6.91 per share (TG: 4.5%, WACC: 9.0%) post earnings revision. 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 - 28 Nov 2017