DBS Vickers 2015-08-27: IHH Healthcare - 2Q core ops within expectations.


2Q core ops within expectations 

  • 2Q15 core profits within expectations; slower growth in headline net profit due to FX translation losses on loans. 
  • Core operations helped by improvement in average revenue per inpatient due to better case-mix 
  • Stronger SGD vs MYR offsets weakness in TRY. 
  • Maintain HOLD, TP revised to RM5.41 (S$1.80) on weaker MYR. 


2Q core results within expectations. 

  • 2Q15 core operations are within expectations, though headline registered only a 9% y-o-y growth. This was a result of exchange losses from its non-Turkish Lira (TRY) denominated borrowings which amounted to RM22m, versus a gain of RM35.9m a year earlier. Excluding this and other exceptional items, net profit would have been RM234.6m, registering a 22% growth and within expectations. 
  • Top line reached RM2.1bn driven by organic growth of its hospitals and contribution from newly opened hospitals, such as Acibadem Atakent, Pantai Manjung and Kota Kinabalu. 

Inpatient revenue showed strong growth. 

  • Inpatient admissions grew by 5.5% in Singapore, while dipping by 0.5% and 1.1% in Malaysia and Turkey respectively. According to management, the growth in Singapore was largely due to local patients. 
  • In Malaysia and Turkey, the dip in patients was mitigated by better case-mix as average revenue per inpatient surged by c.15% and 24% y-o-y respectively. It was indicated that within the increase, there were price hikes of about c.4% and 9% in both countries respectively. 

Singapore ops see more complex foreign cases. 

  • In our view, management remains fairly confident of attracting foreign patients and indicated that despite the weakening of regional currencies impacting traditional sources of patients (i.e. Indonesians, Malaysians), its efforts to reach other nationalities have paid off. It now sees more complex cases of Middle Eastern patients which aid in revenue intensities for its Singapore operations. 


Stable operations within key markets. 

  • We project that IHH will continue to deliver stable growth, driven largely by its key markets, particularly Singapore and Malaysia. Growth in Turkey should also continue, though this could be partially negated by a weaker TRY. Given its diversified operations, the weakness in TRY is offset by the strength of SGD against MYR.

Riding on secular healthcare demand trend. 

  • We expect growth to remain relatively robust and retain our projected earnings growth of 20%/22% for FY15F/16F, driven by the continued ramp-up of new hospitals, coupled with revenue intensities and price increases. 

Valuations already reflect premium status. 

  • In our view, while we expect operations to remain steady, we believe this has already been factored into IHH’s share price with it trading at 52x /43x FY15F/16F PE. Upside risks to our recommendation could be the delivery of M&A or inorganic growth opportunities for the group. 


  • Our target price is revised to RM5.41 (S$1.80), compared to RM5.22/S$1.93 previously. The higher TP in RM is a result of the value of its Singapore operations when translated into MYR, while the lower S$-based TP reflects the weaker MYR. 
  • We continue to adopt sum-of-parts valuation methodology to reflect IHH's various operations and growth profiles across the different geographies. 

Key Risks: 

Economic slowdown. 

  • While healthcare is deemed as a defensive sector, private healthcare will nonetheless be impacted by a slowdown in the economy, since elective procedures can be deferred and patients may choose public hospitals as a lower-cost alternative. 

Staff costs. 

  • Staff costs account for close to one-third of the group’s revenue. Supply shortages in doctors and/or skilled allied healthcare workers could result in higher wages needed to retain or attract talent. 

Outbreak of epidemics. 

  • Outbreak of epidemics, such as SARS, could adversely affect healthcare services as consumers may opt to delay elective surgery and this could negatively impact bed occupancy. 

Andy SIM CFA | http://www.dbsvickers.com/ DBS Securities 2015-08-27
HOLD Maintain HOLD 1.80 Down 1.93