IHH Healthcare (IHH SP) - UOB Kay Hian 2017-11-28: 9M17 Earnings Weighed By Start-up Costs

IHH Healthcare (IHH SP) - UOB Kay Hian 2017-11-28: 9M17 Earnings Weighed By Start-up Costs IHH HEALTHCARE BERHAD Q0F.SI

IHH Healthcare (IHH SP) - 9M17 Earnings Weighed By Start-up Costs

  • IHH Healthcare’s 9M17 adjusted core earnings fell 36% yoy, below our and consensus estimates. Start-up losses associated with expansion plans continued to be the main earnings drag. 
  • On a positive note, existing core markets continued to perform well operationally, registering growth in inpatient volume and revenue intensity. However, we expect cost pressure to remain high on the back of upcoming expansion plans across China over the next 1-2 years. 
  • Maintain HOLD with a lower SOTP target price of S$1.71 (previously S$1.73). Entry price: S$1.50.



RESULTS


9M17 adjusted core earnings below our and consensus expectations. 

  • IHH Healthcare’s (IHH) 9M17 headline earnings grew 33% yoy to RM868.7m, mainly due to a RM554.5m gain from the disposal of Apollo Hospitals. 
  • Stripping out the exceptionals, 9M17 adjusted net profit declined 36% to RM413.4m, which is below our and consensus estimates (representing 61%/52% of our and consensus estimates).

Costs remained high on start-up losses and finance costs. 

  • The decline in earnings was largely attributed to start-up losses associated with higher depreciation (+21% yoy), finance costs (+83% yoy) and staff costs (-18% yoy). 
  • As of 9M17, GHK was still making losses, with start-up losses expanding to RM218.7m (9M16: RM34.2m).

Revenue grew on organic growth and expansion ramp-up. 

  • 9M17 revenue grew 12% yoy to RM9,257.5m as the group saw organic growth from existing operations and a continued ramp-up in new hospitals such as Gleneagles Hong Kong and the Acibadem Altunizade Hospital.


STOCK IMPACT


GHK: Ramping up well, but expect EBITDA breakeven by early-19. 

  • GHK’s operations continued to ramp up progressively, where the hospital is said to be taking on more complex cases with six months into its opening. As it is, revenue intensity at GHK is already tracking close to that of Singapore’s (RM29,884). However, given that the hospital opened 500 beds at one go, we expect GHK to continue incurring sizeable startup costs in the next 12 months. 
  • We expect the hospital to breakeven on an EBITDA level in early-19, in line with the group’s guidance of EBITDA breaking even 24 months from opening.

Core markets continued to show strong operational performance. 

  • Despite the startup losses from expansion plans, the group managed to record a resilient set of operational performances for 9M17 in its key core markets. Its two largest markets, Singapore and Malaysia, managed to record EBITDA growth of 15% and 14% yoy respectively for 9M17, driven by increases in patient volumes and revenue intensity.

Singapore and Malaysia continue to perform well on high intensity cases. 

  • In Singapore, the group continued to see higher foreign patient revenue, where IHH recorded a 25% yoy increase in revenue from Indonesian patients in 3Q17. 
  • In Malaysia, 9M17 revenue intensity increased 11.1% yoy. This was largely due to the ramp-up of centres of excellence, improvement of clinical outcomes as well as upgrade of equipment and facilities at the hospitals.

Update: Chengdu Hospital to open in 4Q18. 

  • Meanwhile, we understand that Gleneagles Chengdu will come on stream in 4Q18. The group has already appointed medical directors as well as a senior management team.


EARNINGS REVISION / RISK

  • Adjust 2017-18 earnings forecast downwards by up to 18% to build in steeper pre-operating expenses and start-up cost assumptions, specifically in higher finance and depreciation costs, as well as staff costs.


VALUATION / RECOMMENDATION

  • Maintain HOLD with a lower SOTP target price of S$1.71 (previously S$1.73). 
  • The lower target price is a mix of downward adjustments of earnings offset by higher EV/EBITDA multiple for hospitals at 19.5x v 19.0x previously and higher market value of PLIFE Reit. Entry price is S$1.50.
  • While we remain positive on the long-term prospects of IHH, given that is situated in growth markets in China, Hong Kong as well as India, we believe near-term earnings will be crimped on expansion plans.

Key risks:

  1. execution risk,
  2. forex risk,
  3. inflationary pressures on operating expenses, and
  4. competition.







Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-28
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.71 Down 1.730



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