IHH Healthcare - CIMB Research 2015-11-27: 3Q seasonally weak; expect strong 4Q

IHH Healthcare - CIMB Research 2015-11-27: 3Q seasonally weak; expect strong 4Q IHH HEALTHCARE BERHAD Q0F.SI 

IHH Healthcare - 3Q seasonally weak; expect strong 4Q 

  • 3Q15 core earnings were broadly in line; 9M15 formed 68% of our forecast (vs. 69% in FY14). 
  • Core net profit growth (+16% yoy) was mostly driven by higher average inpatient revenue in Turkey, ramp-up at Novena Singapore and marginal growth in Malaysia. 
  • 3Q15 EBITDA margins declined to 23.1% (2Q15: 26.1%, 3Q14: 23.9%) due to share-based expenses, new hospitals in M’sia, and bad debt provisions in Turkey. 
  • 4Q is seasonally stronger (weather related and increased patient traffic come yearend). Maintain Add. 

■ Is healthcare affected by weak ASEAN consumer consumption? 

  • In short, yes but it is a lot more resilient. Looking at 3Q results across our healthcare coverage, one trend stood out: ASEAN healthcare revenue is still growing but at a more moderate pace. However, IHH benefits from a diversified portfolio with Acibadem being the biggest growth driver even as ASEAN growth slows. 
  • 3Q15 headline net profit (-19% yoy) looked bad, but was operationally better. 
  • Excluding non-core unrealised forex losses and currency, core net profit rose 16% yoy. 

■ Strong Singapore headline revenue (+19% yoy) and EBITDA (+24%) 

  • A strong S$ made an ordinary quarter look better than it was. Ex-currency, Singapore revenue and EBITDA growth would have been c.2% and c.7% respectively, with improved margins a result of improved operating leverage at Novena. 
  • Reflecting the current slow growth environment, inpatient volumes (+0.7% yoy) and average inpatient revenues (+3% yoy) only grew marginally. 
  • Medical tourism remained flat with weakness in Indonesia, but was better than expected (competitors saw declining medical tourism). 

■ Malaysian growth is slow, hampered by new hospitals 

  • Malaysian revenue grew a healthy 10% yoy, mostly driven by higher average inpatient revenues (+9.6%). However, the general slowdown in consumption following a weaker RM and GST implementation is still apparent and Malaysia reported its fourth consecutive quarter of fairly flat volume growth (-0.2% yoy). 
  • Impaired by losses at new hospitals (Manjung and Kota Kinabalu), 3Q15 EBITDA grew a mere 1% yoy. Ex-new hospitals, Malaysia’s EBITDA growth would have been 5%. 

■ Ex-currency, Acibadem’s 3Q EBITDA grew a healthy 9% yoy but… 

  • …3Q inpatient volumes declined for a second consecutive quarter (-4.7% yoy), while we were expecting strong volumes. 
  • In 2Q, Acibadem recorded its first yoy decline (-1.1%) in inpatient volumes as Ramadan started in mid-Jun 15 vs. end-Jun 14. 
  • Now, management attributed the decline to Eid festivities which fell in 3Q15 vs. 4Q last year. 
  • We would be concerned if 4Q15 volume numbers remain weak. Notwithstanding, the increased average inpatient revenue (+20.2%) more than compensated for the lower volumes. 

■ Earnings growth will come when new hospitals mature 

  • While weak macros, new hospitals and higher share-based expenses slowed down earnings growth in 3Q, we remain confident of the positive structural themes and management’s ability to ramp up capacity at new hospitals. 
  • Summer months and Eid festivities would have also accounted for a seasonally weaker 3Q; we expect a strong 4Q. 
  • We maintain our Add rating and SOP-based target price of S$2.52.

Jonathan SEOW CFA UOB Kay Hian | Kenneth NG CFA CIMB Securities | http://research.uobkayhian.com/ 2015-11-27
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 2.57 Same 2.57