INVESTMENT HIGHLIGHTS

• 1QFY18 earnings below expectations

• EBITDA grew by +8% despite decline in earnings

• Revenue growth remains strong across home markets

• FY18-19F earnings revised down by -8.5% and -7.5%

• Maintain BUY with a revised TP of RM6.95 per share

Below expectations. IHH Healthcare’s 1QFY18 normalised earnings came in at RM120.5m which is below our and consensus’ full-year earnings estimates at 12%. During the quarter, revenue increased by +6.3%yoy whilst earnings dipped by -40.3%. On a quarterly sequential basis, revenue was flat at -1.0% and earnings declined by -33.7% respectively.

EBITDA grew by +8.0% despite decline in earnings. In 1QFY18, the year-over-year increase in revenue (+6.3%yoy) and EBITDA (+8.0%yoy) were mainly due to: (i) organic growth from existing hospitals; (ii) continued ramp up of Gleneagles Hong Kong (GHK) and Acibadem Altunizade as well as; (iii) contribution from newly acquired hospitals in Bulgaria and India. However, IHH’s normalised earnings was lower by +40.3%yoy due to: (i) the incremental depreciation, amortisation and finance costs incurred for GHK and Acibadem Altunizade and; (ii) foreign exchange losses arising from the weakening of USD on the group’s USD -denominated cash balances.

Revenue growth remains strong across home markets.

Inpatients admissions grew in most of its home markets such as: Singapore, India and Acibadem by +2.7%, 6.7% and 14.4% year-overyear respectively while Malaysia recorded a marginal contraction by - 0.6%yoy. The surge in the patient admissions in Acibadem is mainly attributable to the admissions into the Bulgarian hospitals where both the revenue and admissions are booked under Acibadem. As for the revenue per inpatients, the growth remains strong in all markets where the increase recorded were: +5.0% +9.6%. +8.5% and +14.4%yoy respectively for Singapore, Malaysia, India and Acibadem.

FY18-19F earnings reduced by -8.5% and -7.5%. We are revising our FY18-19F earnings by -8.5% and -7.5% as we are expecting the depreciation and amortisation costs of GHK and Acibadem Altunizade to only significantly reduce in 2HFY18 with the ramp up of both hospitals. The key risks to our earnings are: (i) delay in opening of new hospitals; (ii) longer-than-expected gestation period for new hospitals; (iii) lower-than-expected inpatient admissions and revenue per patient and; (iv) increasing cost of operations.

Maintain BUY with a revised Target Price (TP) of RM6.95. Post earnings announcement, we are reiterating our

BUY recommendation on IHH with a revised TP of RM6.95 per share (TG: 4.7%, WACC: 9.0%) after we roll forward our valuation base year to FY19. Going forward, we are expecting further improvements in terms of revenue contributions coming from GHK and Acibadem Altunizade as both hospitals continue to ramp up respective operations and receive more complex cases which will offset the incremental depreciation, amortisation and finance costs of these two hospitals. Additionally, we opine that its current revenue growth is sustainable given the expected addition of new hospitals such as Gleneagles Chengdu and expansion of Acibadem Maslak currently underway which is expected to be completed by end-CY18 which will drive revenue growth even further for IHH. Furthermore, IHH’s balance sheet remains robust with a cash balance of RM6.2b which is able to offset its current debt obligation of RM6.9b.

Source: MIDF Research - 28 May 2018