UOB Kay Hian 2015-08-27: IHH Healthcare - 2Q15: Upgrade To HOLD After Share Price Decline.


2Q15: Upgrade To HOLD After Share Price Decline 

  • IHH’s results were within our expectations. Healthy demand, more complex cases and price adjustments delivered strong revenue growth for the group. 
  • We note that IHH’s aggressive expansion continues but remain vigilant of the group’s execution risks. 
  • Post a 15.6% decline in share price from its high in May 15, we upgrade the stock to HOLD. Target price: S$1.77. Entry price: S$1.60. 


  • 2Q15 net profits were within our expectations, representing 23% of our full-year estimates. 
  • Inpatient admissions update. In Singapore, the 5.5% yoy inpatient increase was attributed mainly to local patients as well as medical travellers from non-traditional markets such as the Middle East. In Turkey, inpatient admissions declined by 1.1% yoy to 32,636 due to the start of the Ramadan period in mid-Jun 15 as compared with the start of Ramadan period at end-June in 2014. In Malaysia, hospitals saw a marginal 0.5% yoy decrease in inpatient admissions mainly due to a general slowdown in consumption following the implementation of GST in Apr 15. 
  • Higher revenue intensity on the back of increasing complexity in medical cases and improving revenue mix. In Singapore (+4.9% yoy) and Malaysia (+14.9% yoy), average revenue per inpatient reached RM24,529 and RM5,629 in 2Q15 respectively. Acibadem (+24.3% yoy) achieved an average revenue per inpatient of RM10,420. 


• Aggressive expansion is expected to continue. 

  • IHH is still in expansionary mode, which we think will ramp up the group’s capacity and meet the increasing demand for quality private healthcare across its home markets. We understand that the group’s capacity will reach more than 10,000 beds before 2017 with the expansion of existing facilities through new developments and selective acquisitions. 

• Cost pressures persist but so far under control. 

  • Cost pressures are likely to remain high from wage inflation as well as from the implementation of 6% Goods and Services Tax (GST) in Malaysia. However, we expect IHH to offset the impact of these higher cost pressures through stronger revenue intensity and tighter cost controls. The group targets to achieve optimal operating leverage by growing patient volumes in tandem with phasing in the opening of new wards at these new facilities. 

• Forex risk management update. 

  • IHH’s geographically diversified operations allow it to spread currency risks arising from translating differences in the group’s balance sheet and income statement. Where possible, the group minimises most of its currency risk by borrowing in the functional currency of the operating entity or borrowing in the same currency as its foreign investment. With the exception of Acibadem Holdings (Euro- and US dollar-denominated borrowings), it hedges its cash flows by conserving hard currency receipts from medical travellers to service the debts. 


  • No change in earnings. 


  • Upgrade to HOLD but maintain target price at S$1.77. We note that post a 15.6% decline in share price from its high in May 15, IHH is currently trading at 38.2x 2016F PE, slightly higher than the industry’s 31.5x but at a cheaper valuation based on its 2016F PEG ratio of 1.56x vs peers’ 2.2x. 
  • Key risks include: 
    1. execution risk, 
    2. forex risk, 
    3. inflationary pressures on operating expenses, and 
    4. competition.

Andrew Chow CFA | Bennett Lee CAIA | http://research.uobkayhian.com/ UOB KH 2015-08-27
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