IHH Healthcare - CIMB Research 2016-02-26: 4Q was a transitional quarter

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IHH HEALTHCARE BERHAD Q0F.SI 

IHH Healthcare - 4Q was a transitional quarter 

• 4Q15 core net profit was slightly below consensus, but in line with our expectation. FY15 (RM899m, +15% yoy) formed 101% of our forecast and 97% of consensus. 
• 4Q core earnings (-11% yoy) looked ugly but included acquisition-related costs and drags from new and upcoming hospitals. FY15 still grew a healthy 15%. 
• Topline in all home markets still growing, but lower margins in Malaysia and Turkey. 
• Maintain Add, with a lower SOP-based TP (S$2.49) after cutting margin assumptions. 

■ Transitional costs mitigated 4Q revenue growth of 18% 

• 4Q15 bore the brunt of transitional costs: 
  1. financing and acquisition-related costs for Global Hospital (consolidated from Dec), 
  2. Global Hospital losses and 
  3. start-up and pre-operating losses at new hospitals in Malaysia, Turkey and Hong Kong.
• These costs therefore eroded 4Q’s healthy topline growth of 18%, with core net profit coming in at RM215m (-11%). 
• Excluding Global Hospital losses and its financing costs, we estimate 4Q net profit would have been flattish. Notwithstanding, FY15 still grew a healthy 15%. 

■ Singapore’s 4Q revenue up 23% yoy, EBITDA a stronger 38% 

• Among its key markets, Singapore was the star performer and had been driving most of the growth in FY15. The continued ramp-up at Novena was especially impressive, with its 4Q revenue up 36% yoy and EBITDA up a stronger 48% (to RM38m, or ~18% of total Singapore EBITDA) on the back of operating leverage. 
• Support also came from a strong S$. Despite weakness in medical tourism, local patients more than compensated with volumes growing 6.6% yoy in 4Q, and average inpatient revenue growing 1%. 

■ Malaysia and Turkey driven entirely by revenue intensity 

• FY15 revenue growth in Malaysia (+10% yoy) and Turkey (+11% yoy) was almost entirely driven by higher revenue intensity which grew by 12% and 15%, respectively. 
• In addition to price increases, management highlighted that the higher intensity was also a result of an ageing population where elderly patients tend to require more treatment. 
• Dousing this positive is the general slowdown in consumption that negatively impacted inpatient volumes (both markets -1% yoy). 

■ Hampered by new hospitals in Malaysia and Turkey 

• On the flip side, only Singapore is benefitting from increased operating leverage (FY15 EBITDA margins +103bp yoy) while EBITDA margins in both Malaysia (-200bp) and Turkey (-40bp) are down due to new hospitals, with the added negative impact of Goods and Services Tax (GST) in Malaysia. 
• New market India is still loss-making, having only been acquired in FY15, which was further impacted by one-off floods in Chennai. 

■ Maintain Add as IHH delivers on growth 

• We continue to like IHH for its earnings delivery. Despite 
  1. cost pressures, 
  2. start-up losses at new hospitals, 
  3. pre-operating losses in Hong Kong and 
  4. the integration of newly acquired Global Hospitals, 
  
  FY15 core net profit ex-PLife REIT still grew by 10% on a constant currency basis. 
• The group is also expanding into North Asia, with its Hong Kong and Chengdu hospitals due to open in 2017. 
• We maintain our Add rating, but with a lower SOP-based target price after cutting margin assumptions.

Jonathan SEOW CIMB Securities | Kenneth NG CFA CIMB Securities | http://research.uobkayhian.com/ 2016-02-26

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 2.49 Down 2.52