Review

• IHH’s reported net profit declined by 34.4% YoY to RM612.4mn. However, excluding exceptional items amounting to RM253.6mn, core net profit declined by 3.7% YoY to RM866.0mn, within ours but below consensus expectations at 99.3% and 90.8% respectively. Chunky exceptional items include foreign exchange loss on borrowings (RM335.2mn), value-added tax settlement relating to prior years (RM53.6mn) and impairment loss on investment in Khubchandani Hospital (RM97.3mn).

• Separately, the group declared a first and final interim dividend of 3.0sen per share, similar to FY15.

• Overall, FY16’s revenue and EBITDA respectively grew by 18.5% YoY and 6.6% YoY but core net profit declined by 3.7% YoY. The robust revenue growth was achieved on the back of organic growth at existing and newer hospitals in home markets (Singapore, Malaysia & Turkey) as well as acquisitions in India and Bulgaria. As for the softer EBITDA growth, it was due to lower revaluation gain from PLife REIT’s investment properties (RM8.5mn in FY16 vs. RM71.7mn in FY15) and the recognition of higher doubtful debt expenses mainly by Acibadem Holdings (RM63.8mn in FY16 vs. RM44.6mn in FY15). Meanwhile, at the bottom line, core net profit declined by 3.7% YoY due to incremental depreciation from new hospitals and higher net financing costs. On the group’s financial strength, its balance sheet remains healthy with net gearing unmoved at 0.2x.

• Parkway Pantai: In constant currency terms, FY16’s revenue and EBITDA respectively grew by 15% YoY and 6% YoY. This was achieved on the back of the continuous ramp up of Mount Elizabeth Novena Hospital in Singapore and newer hospitals in Malaysia as well as the acquisition of Continental Hospital and Global Hospital in India. Inpatient admissions in Singapore and Malaysia respectively grew by 9.1% YoY to 74,119 and 5.4% YoY to 193,113. EBITDA margins declined by 2.5%-points YoY to 22.8% mainly due to start-up losses of RM17.9mn from new hospitals in Malaysia and pre-opening expenses of RM72.6mn from Gleneagles Hong Kong.

• Acibadem Holdings: In constant currency terms, FY16’s revenue and EBITDA respectively grew by 22% YoY and 7% YoY. The robust revenue growth was achieved on the continuous ramp up of existing and new hospitals as well the acquisition of Tokuda Group and City Clinic Group in Bulgaria. Inpatient admissions grew by 31.6% YoY to 171,583. Notably, EBITDA growth would have been stronger at 18% YoY if not for the recognition of higher provision of doubtful debts of RM53.6mn due to the provision for receivables from Libyan patients. Management alluded that the provision is a conservative approach taken by the group. Apart from this, the higher operating leverage achieved was also partially offset by higher staff costs with higher minimum wages effected from 1 January 2016, and higher operating costs in tandem with the Turkish Lira’s depreciation against the USD.

• QoQ, notable observations include Gleneagles Hong Kong incurring increased pre-opening expenses, almost doubling from RM19.7mn in 3QFY16 to RM38.4 in 4QFY16, as it gears up for its imminent opening and Acibadem Holdings rebounding from the seasonally slower 3QFY16 with inpatient admissions growing by 14.5% QoQ to 50,470 and revenue and EBITDA in constant currency terms respectively increasing by 22% QoQ and 64% QoQ.

Impact

• Our FY17/FY18 earnings estimates are reduced by -4.4%/-3.1% to RM1,135.4mn/RM1,459.3mn upon imputing FYE16 figures into our model. We also introduce FY19 earnings of RM1,719.4mn.

Outlook & Briefing Highlights

• Management remains hopeful on the prospects of the healthcare services market, especially with regards to its core operations in Singapore, Malaysia, Turkey and India. Strategically, whilst continuing to ramp up its existing operations, integrate its recent acquisitions and optimise costs amidst a challenging operating environment, we understand that management is still on the lookout for value accretive opportunities.

• As for the weakening of the group’s home market currencies against the USD, management is actively looking at options to reduce its exposure. As at 4QFY16, the bulk of IHH’s borrowings are denominated in Euro (29%), Japanese Yen (18%), Japanese Yen (18%) and Singapore Dollar (17%). USD denominated debts only account for 8% of total borrowings and based on the group’s 2015 annual report are due for maturity in 2017 to 2020.

• On the expansion front, management alluded that Gleneagles Hong Kong (GHK) is on track to begin operations by end-March. Currently, staffing for GHK is complete and it is prepping for its opening by conducting orientations, trial runs, and equipment calibration. As for Gleneagles Khubchandani in Mumbai, India, its progress remains stalled over disagreement with its joint venture partner, hence the prudent measure taken by management to impair it.

Valuation & Recommendation

• Our TP is revised to RM6.40/share (from RM6.50/share) based on SOTP. At current levels, against CY17, the stock is trading at EV/EBITDA of 20.5x, close to the 20.9x implied by our TP. Reiterate SELL.

Source: TA Research - 24 Feb 2017