INVESTMENT HIGHLIGHTS

• 2QFY18 earnings more than tripled to RM256.5m

• Excluding the impact of forex, revenue and EBITDA posted double digit growth

• 1HFY18 earnings of RM377.0m came in within ours and consensus’ expectations

• It is actively managing exposure to currency volatility

• Maintain BUY with an unchanged TP of RM7.00 per share

Within expectations. IHH Healthcare’s 2QFY18 normalised earnings came in at RM256.5m. This brings its 1HFY18 earnings to RM377.0 which is broadly within our and consensus full-year earnings estimates at 43.0%. During the quarter, revenue declined by -4.0%yoy whilst earnings tripled year-on-year.

Marginal decline in revenue and EBITDA. In 2QFY18, the marginal year-over-year increase in revenue of -4.0%yoy and EBITDA of- 1.0%yoy were mainly due to the effect of strengthening Ringgit against the currencies of the countries which the group operates. Nonetheless, excluding the effects of strengthening Ringgit, revenue and EBITDA rose by +14.0%yoy and +13.0%yoy respectively as a result of the: (i) organic growth from existing hospitals; and (ii) continued ramp up of Gleneagles Hong Kong (GHK) and Acibadem Altunizade hospital.

However, earnings tripled year-on-year. Despite the decline in 2QFY18 revenue and EBITDA, IHH’s normalised earnings tripled on a year-on-year basis due to: (i) low base effect in 2QFY17 where RM21.3m interest expense was accrued for capital gain tax payable; and (ii) RM17.7m additional tax provision relating to prior year’s tax.

Managing exposure to currency volatility. IHH has taken up foreign currency debt amounting to USD680.0m to finance Acibadem’s expansion. Since June 2018, Lira went down as low as -30.0% against USD and this could impact IHH’s bottom line. Nonetheless, we understand that the management team are actively managing Acibadem’s interest against the volatility of the Turkish Lira through: (i) resizing Acibadem’s balance sheet so as to reduce the foreign currency debt exposure; and (ii) shelving all capex plans for Acibadem. On the bright side, the devaluation of Lira is expected to result in strong increase in medical tourism.

Source: MIDF Research - 29 Aug 2018