Health Management International (HMI SP) - UOB Kay Hian 2017-04-20: Solid Operations With More Growth Headroom

Health Management International (HMI SP) - UOB Kay Hian 2017-04-20: Solid Operations With More Growth Headroom HEALTH MANAGEMENT INTL LTD 588.SI

Health Management International (HMI SP) - Solid Operations With More Growth Headroom

  • Health Management International (HMI) is a private healthcare operator in Malaysia, helmed by a strong management team with proven track record of unlocking value. 
  • We are upbeat on HMI’s growth prospects, driven by its focus on high revenue intensity cases and buoyed by healthy demographic trends as well as the positive medical tourism outlook in Malaysia. 
  • Furthermore, post its recent consolidation transaction in Mahkota and Regency, its ownership structure is cleaner, where the group stands to benefit both operationally and financially. 
  • Initiate coverage with BUY and DCF-based target price of S$0.83.



INVESTMENT HIGHLIGHTS 


Revenue uplift on higher patient load … 

  • We identify higher patient load as one of the key revenue drivers, as the group carries out expansion plans to add more operational beds at both hospitals and ramp up bed occupancy rate. Indicatively, the group is estimated to add 30-35 additional beds to each of the hospitals by 2017. 
  • Meanwhile, we also look forward to medium-term growth plans, where HMI is currently pending approvals to start construction of a new hospital extension block at Regency. Construction is estimated to complete by 2020, which will more than double Regency’s existing capacity.

…and increased revenue intensity. 

  • Additionally, we expect top-line to be bolstered by higher revenue intensity on the back of development of centres of excellence and increased marketing activities targeted to attract more medical tourists.

3-year EPS CAGR of 32.4% post acquisition. 

  • On 27 March, HMI completed the acquisition of non-controlling interests in both Mahkota and Regency. Following which, the group structure is cleaner where increased scale enables greater operational flexibility and improved access to funding options. 
  • Transaction is also deemed to be financially accretive, where total purchase consideration of S$183.2m implies EV/EBITDA of 12.1x (group FY16 EV/EBITDA: 22x). Indicatively, on a historical basis, the transaction is 30.4% accretive to fully-diluted EPS for FY16. 
  • Post consolidation, we project FY17-19 EPS to grow at a 3-year CAGR of 32.4%.

An attractive and affordable medical tourism destination. 

  • A key attraction for medical tourism in Malaysia is the relatively lower and more affordable pricing as compared to regional peers. Indicatively, we note that average bill sizes at HMI’s hospitals are almost one-third of Singapore’s private healthcare costs. 
  • As it is, Mahkota alone takes up 10% market share of Malaysia’s medical tourists, where more than 20% of patient load in HMI are medical tourists.

Favourable secular trend to spur private healthcare demand. 

  • Malaysia’s healthcare market is buoyed by favourable secular trend, such as a growing population and rising income. 
  • Meanwhile, government healthcare expenditure (as % of GDP) is still trailing the ASEAN average, which may suggest an inclination towards private hospitals as overly-burdened public systems typically result in longer waits and lower quality. With growing affluence, this may underpin increased demand for private healthcare.


VALUATION/RECOMMENDATION

  • Initiate coverage with BUY and DCF-based target price of S$0.83. 
  • Our DCF-based target price of S$0.83 assumes explicit 2017-22F free cash flow forecast, terminal growth of 2.5% (in line with Malaysia’s 10-year long-term inflation rate) and WACC of 7.0%.
  • Despite its recent share price run-up, HMI’s relative valuation still looks compelling at current levels, where the stock is trading at 26.5x FY18F PE, or a 31% discount to peers (38.6x). We do not think such a steep discount is warranted, given the strong EPS growth forecast of HMI (3-year FY17-19F EPS CAGR of 32% v peers’ 19%), which will be buoyed by the recent consolidation of ownership of hospitals, stable growth trajectory on expansion plans as well as bright medical tourism outlook.




Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-04-20
UOB Kay Hian SGX Stock Analyst Report BUY Initiate BUY 0.83 Same 0.83



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