IHH Healthcare - New hospitals to drive long term growth
- 3Q16 below expectations on higher expenses.
- Revenue growth remains strong (3Q16 +18%).
- Potential impact from depreciation of Turkish Lyra and MYR, partially mitigated by stronger SGD against MYR.
- TP lowered to RM7.15.
Gleneagles Hong Kong leads IHH’s ‘Growth 2.0’.
- The long awaited Gleneagles HK, targeted to open by March / April 2017 is on track. We remain positive on the prospects of Gleneagles HK.
- New hospitals targeted to open in 2017 are on track as well - Acibadem Altunizade in early 2017, and Parkway Hospital in Chengdu by the end of 2017. We believe IHH Healthcare (IHH)’s medium-term growth will likely be contributed by new hospitals largely in China and India.
- Management intends to add c.1,000 new beds (includes Gleneagles HK) by the end of 2017.
9M16 results below expectations.
- IHH’s core net profit (excluding forex and one-off gains) fell 6% y-o-y to RM643m, largely due to higher operating expenses, resulting in a compression of core EBIT margins from 17% in 9M15 to 14% in 9M16.
- Key positives:
- strong revenue growth,
- lower start-up costs from new hospitals in Malaysia, and
- Malaysia has picked up.
- Key negatives:
- margin compression,
- higher preoperating costs, and
- depreciation of Turkish Lyra and MYR.
Near term startup costs, but longer term prospects positive.
- 3Q results confirm our view that near term earnings growth could moderate due to :
- start-up/pre-operating costs of new hospitals, and
- macroeconomic headwinds.
- That said, revenue growth still remains resilient amid market uncertainties. We believe any share price weakness offers a good entry opportunity for medium- to long-term growth prospects.
- We like IHH for its geographical diversification and recognised presence as a premium healthcare player.
- We maintain our BUY rating with TP of RM7.15, based on SOTP valuation methodology.
- Key catalysts are
- positive performance and shorter-than-expected gestation period of Gleneagles HK and the other new hospitals,
- better-than-expected performance despite macroeconomic headwinds, and
- positive developments in new markets, such as India.
Key Risks to Our View
- Economic slowdown;
- lower-than-expected performance, especially in new markets; and
- government policy changes.