CIMB Securities 2015-08-27: IHH Healthcare - Higher intensity mix stood out.


Higher intensity mix stood out 

  • IHH’s defensive earnings remain largely unperturbed amidst today’s weak consumer market, bar accounting impact from currency movements. Its 2Q15/1H15 core net profit formed 24%/47% of our and 25%/49% of consensus full-year forecasts. 
  • We deem the results as in line given that 1H is seasonally weaker (typically 46-48% of full-year). IHH’s 2Q15 results can be summarised as: 
    1.  higher service intensity helped negate the slight inpatient volume dip, 
    2.  strong S$ totally offset by weak lira, and 
    3.  exchange losses from US$ borrowings. 
  • Our SOP-based target price falls to S$2.16 on an increased share base due to employee incentive options. 
  • We maintain our Add rating

The good: higher service intensity; The bad: volume dips 

  • Group topline growth (+12% yoy) was mostly driven by Singapore (+16% yoy), as Singapore hospitals saw: 
    1.  volume growth (+5.5% yoy) from domestic patients, and 
    2.  higher average inpatient revenue (+4.9% yoy), primarily from higher service intensity for its Middle Eastern patients (where intensity can be as much as 2.5x Indo patients). 
  • While Malaysia’s inpatient volumes fell 0.5% yoy on the back of weak consumption post-GST, Acibadem’s 1.1% dip in volumes were mostly seasonal as Ramadan started in mid Jun 15 vs. end-Jun 14. Mitigating the volume declines in both markets were much stronger average inpatient revenues (Malaysia: +14.9% yoy; Acibadem: +24.2%). 

Overhang from US$ borrowings lifted 

  • 2Q15 EBITDA margins remained stable at 26.1% (2Q14: 26.2%; 1Q15: 25.3%), which would have been stronger if not for 
    1.  translation losses from a weak lira, 
    2.  start-up losses from new hospitals, and 
    3.  share based expenses from vesting of employee incentive plans. 
  • The other bright spot was the restructuring of US$ borrowings into Euro in anticipation of a rate hike. US$ debt and a weakening lira resulted in exchange losses of RM138m in 1H15 (29% of 1H15 core net profit). Even as this was accounting in nature and unrealised, it lifted the overhang and should be a positive going forward (Figure 10). 

The value: cheaper than peers, more growth potential 

  • IHH offers value at 21.8x CY15 EV/EBITDA (peer average 23.2x), with 3-year EPS CAGR of 14% (peer average 11%). In Jul 15, IHH entered into a 70:30 JV to build a hospital in Shanghai. Confirmation of this, as well as other M&A activities and growth at its existing hospitals, remain the key positives for IHH.

Kenneth NG CFA | Jonathan SEOW | http://research.itradecimb.com/ CIMB Securities 2015-08-27
ADD Maintain ADD 2.16 Down 2.43