IHH’s 1QFY13 core earnings of MYR133.5m were below consensus but within our expectations, accounting for 18.7% and 21.8% of the respective full year forecasts. Following a conference call with Management, we feel largely positive on its medium term outlook on potential turnaround at some of its newly opened hospitals. As such, we lift our core earnings estimates by 0.4%-4.5% for FY13F and FY14F. Maintain NEUTRAL, with our FV fine-tuned to MYR3.69.

- Decent quarter on improved Singapore and Turkey ops. IHH clocked in 1QFY13 revenue of MYR1.6bn (+6.3% q-o-q; +28.7% y-o-y) on improved contribution from its new hospitals as well as from a full three-month consolidation of Acibadem Holdings (vs two-month in 1Q12). Correspondingly, EBITDA expanded to MYR394.2m (+11.7% q-o-q; +21.7% y-o-y), leveraging further on reduced losses from its Mount Elizabeth Novena Hospital. EBITDA margin, however, declined by 140bps y-o-y to 24.3% due to higher personnel and rental expenses. All in, its 1QFY13 core earnings of MYR133.5m came in within our expectations.

- Earnings revision. Management in the conference call highlighted that some of IHH’s newly opened hospitals are showing financial improvements. For instance, its Mount Elizabeth Novena Hospital ended 1QFY13 at an EBITDA loss of MYR3.0m vis-à-vis MYR15.6m loss in 1Q12 while in Turkey, it has started ramping up operations at Acibadem Ankara Hospital and Acibadem Bodrum Hospital. In view of that and following our internal coverage reallocation, we take the opportunity to revisit and revamp our earnings model. Consequently, we revise our core earnings estimates upwards by 4.5% for FY13F and 0.4% for FY14F but lower our FY15F net profit forecast by some 7.5% after factoring in higher operating and depreciation expenses in view of its expansion plans.

- Maintain NEUTRAL. While we believe IHH’s medium term earnings outlook is set to improve, we are maintaining our NEUTRAL call for now given its relatively unattractive valuation. Based on its last closing price, the stock is currently trading at a demanding 38.9x FY14 P/E.Our SOP-based FV now stands at MYR3.69 (from MYR3.61 previously).

Source: RHB