Review

• Excluding exceptional items, IHH’s core net profit of RM643.5mn (-6.1% YoY) was below ours and consensus estimates at 66.7% and 65.1% respectively. The deviation was due to Acibadem Holdings’ weaker than expected margins.

• Overall, for 9MFY16, revenue and EBITDA respectively grew by 20.0% YoY and 12.5% YoY but core net profit declined by 6.1% YoY. Revenue was driven by organic growth from existing and newer hospitals in home markets (Singapore, Malaysia and Turkey) as well as acquisitions in India and Bulgaria. Turkey recorded the strongest inpatient admission growth of 26.1% YoY. Meanwhile, increased operating leverage was partially offset by higher operating costs, start-up losses from new hospitals and pre-opening expenses from Gleneagles Hong Kong. On its financial strength, the group’s balance sheet remains robust with its net gearing at 0.2x and cash and cash equivalents of RM2.1bn.

• Parkway Pantai: In constant currency terms, 9MFY16 revenue and EBITDA respectively grew by 16% YoY and 7% YoY. This was largely driven by the continuous ramp up of Mount Elizabeth Novena Hospital (opened in mid-2012) in Singapore which took less than a year to breakeven. Driven mainly by local patients, Singapore and Malaysia respectively recorded inpatient admission growth of 10.6% YoY to 55,945 and 6.0% YoY to 145,795. EBITDA was partially offset by higher operating costs, start-up losses of RM16.2mn from new hospitals in Malaysia and preopening expenses of RM34.2mn from Gleneagles Hong Kong which is slated to open in 1HCY17. Correspondingly, EBITDA margins declined by 2.2%- points to 24.6%.

• Acibadem Holdings: In constant currency terms, 9MFY16 revenue and EBITDA respectively grew by 20% YoY and 10% YoY. The robust growth was in tandem with the continuous ramp up of Acibadem Atakent Hospital (opened in January 2014) and Acibadem Taksim Hospital (opened in October 2015) as well as the recently acquired Tokuda Group and City Clinic Group. Inpatient admissions grew by 26.1% YoY to 121,113. EBITDA margins however declined by 1.4%-points to 16.0% with higher operating costs (higher minimum wages implemented in January 2016) and rental expenses due to the Turkish Lira’s sustained weakness against the USD.

• QoQ, mixed performance was observed from Parkway Pantai and Acibadem Holdings. Parkway Pantai achieved modest revenue and EBITDA growth of 2% QoQ and 3% QoQ respectively on improved inpatient admissions and revenue intensity. Whereas, Acibadem Holdings’ revenue and EBITDA respectively declined by 6% QoQ and 46% QoQ due to the summer months and long holidays during 3QFY16 to celebrate Eid festivities.

• Similar to 3QFY15, no dividends were declared.

Impact

• Our FY16/FY17/FY18 earnings estimates are reduced by 9.5%/4.2%/2.8% after accounting for weaker margins at Acibadem Holdings.

Outlook & Briefing Highlights

• Acknowledging the recent weakness in strength of emerging currencies on its foreign currency borrowings, particularly of the USD denominated borrowings undertaken by Acibadem, management alluded that it would be partially hedged by Acibadem’s medical tourism receipts, which are typically in USD and estimated to be about 6-7% of its revenue. As at 3QFY16, IHH’s USD denominated borrowings of approximately USD129.3mn represents 7.6% of total borrowings and are due for maturity in 2018 and 2019.

• To weather cost pressures (i.e. from pre-opening and start-up costs), the group would continue to focus on cost optimisation. For instance, the group has managed to trim down its projected capex for Gleneagles Shanghai Hospital from RM801.3mn to RM644.1mn by deciding to source foreign designed medical equipment that locally made.

• With regards to operations outside its home markets, management shared that the 500-bed Gleneagles Hong Kong is on-track for commencement by 1HFY17. As for its recent strategic partnership in Taikang, management is optimistic on it as it would be a springboard for accelerated growth across China. Meanwhile, for Gleneagles Khubchandani in Mumbai, its development remains on hold due to stalled negotiations with its joint venture partner.

Valuation & Recommendation

• We maintain our SELL recommendation on IHH with a lower TP of RM6.50/share (from RM6.60/share) based on SOTP. Against CY17, this translates into an implied EV/EBITDA of 21.2x which is above that of large market capitalization peers of 20.1x.

Source: TA Research - 25 Nov 2016