KEY INVESTMENT HIGHLIGHTS

• 3QFY19 normalised earnings came in at RM202.3m, within ours and consensus’ expectations

• Solid performance from Singaporean and Malaysian hospitals mainly driven by organic growth

• Acibadem saw a marginal dropped in local patient at its non-Istanbul hospitals

• Meanwhile, performance of Fortis and hospitals in Greater China region remain encouraging

• Maintain BUY with a revised TP of RM6.78 per share

Within expectations. IHH Healthcare Bhd (IHH) has reported 3QFY19 earnings of RM236.3m (from a recorded loss of -RM104.1m in 3QFY18). Excluding the exceptional items such as foreign exchange impact, 3QFY19 normalised earnings came in at RM202.3m while 9MFY19 normalised earnings came in at RM630.7m (-8.1%yoy). This is within ours and consensus’ expectations, accounting for 61.0% and 60.0% of full year FY19 earnings forecast respectively. Moving forward, we expect much stronger earnings performance next quarter as historically 4Q is the group’s strongest quarter.

Strong performance from the Singapore and Malaysia operations. Parkway Pantai’s Singaporean and Malaysian hospitals have been the group best cashflow-generative operations. Historically, these two markets contributed about 60.0% of the group’s EBITDA. In 3QFY19, both markets continue to support the group’s overall performance with total revenue growth of +13.9%yoy. The inpatient admission grew by +12.0%yoy to 77,506 patients during the quarter. Meanwhile, revenue intensity per inpatient for both markets rose by +3.5%yoy and +4.3%yoy respectively driven by the: (i) strong organic growth from existing hospitals and; (ii) higher contribution from medical tourism. Note that the Malaysia operation recorded an increase in foreign patient of +28.0%yoy. Moreover, the acquisition of Prince Court will contribute positively to the segment’s earning post completion of its acquisition in 1QFY20.

Marginal dropped in revenue from Acibadem. Acibadem’s 3QFY19 performance was impacted by the drop in local patient (from social insurance scheme) at its non-Istanbul hospitals. This dragged Acibadem’s overall inpatient admission by -6.1%yoy. However, revenue intensity per inpatient rose by +12.3%yoy due to: (i) upward price revision imposed on private insurance and out-of-pocket patients; (ii) more complex cases taken and; (iii) increase in foreign patients. In order to further mitigate the foreign exchange loss on its non-Lira borrowings, it has refinanced about USD170.0m equivalent of non-Lira debt and swapped about 40.0% of it into Lira debt in July 2019. Currently, Acibadem’s non-Lira exposure is at USD250.0m (vs FY18 of USD700.0m). The management is targeting to reduce this to below USD200.0m by year end.

Long-term growth opportunities in India and Greater China. The recently-acquired Fortis has remained profitable for the third consecutive quarters. 3QFY19 PBT came in at INR70.6 crores thanks to a discipline turnaround plan by the new management. Meanwhile, Gleneagles Hong Kong’s narrowing losses contributed to the decrease in LBITDA to - RM39.0m during the quarter from -RM49.0m registered in 3QFY18. We expect the LBITDA will contract further, driven by the continuous ramp-up of operational beds. Gleneagles Chengdu Hospital has also commenced operation in October 2019, with initial operation of 100 beds.

Impact to earnings. We are fine-tuning our earnings forecasts for FY19F and FY20F downwards by -3.9% and -2.8% respectively as we input a lower rate of growth in patient admission primarily for Acibadem.

Target price. We are revising our target price to RM6.78 per share (previously RM6.84). Our target price is based on DCF valuation methodology with a terminal growth assumption of 4.7% and WACC of 9.0%.

Maintain BUY. We acknowledge that the group is facing near term business headwinds particularly in the form of weak Turkish Lira as well as legacy issues within Fortis business. Nonetheless, we are maintaining our BUY recommendation as we remain confident of IHH’s ability to response to these challenges. Management has taken active efforts to reduce the exposure on non-Lira denominated borrowings while adopting a discipline turnaround plan for Fortis. We believe that the strong cashflow generative markets like Singapore and Malaysia will continue to support group’s performance in the near term. Furthermore, IHH’s balance sheet remains robust with a net gearing of 0.15x premised on strong cash position of RM4.6b. In addition, we expect a long-term growth opportunities in India and Greater China as the markets are largely under-served. In summary, we like IHH for its: (i) geographically-diversified revenue base; (ii) robust balance sheet and; (iii) strategic expansion plans.

Source: MIDF Research - 2 Dec 2019