IHH Healthcare - UOB Kay Hian 2016-05-27: 1Q16 Results In Line With Expectations

IHH HEALTHCARE BERHAD Q0F.SI

IHH Healthcare (IHH SP) - 1Q16: Results In Line With Expectations

IHH’s results were in line with our expectation.
Strong inpatient volumes, increasing complex cases and price adjustments accounted for the strong revenue growth.
We raise our 2017-18 net profit estimates by 3-4% to account for top-line contribution from the Bulgaria acquisitions.

IHH Healthcare’s (IHH) 1Q16 net profit (excluding EI) increased 5% yoy to RM 238.3m, in line our expectations, representing 22% of our full-year estimate. Net profit was supported by a solid revenue growth of 24% yoy to RM2.5b on the back of an increase in inpatient volume and revenue intensity, organic growth of existing operations and commencement of Gleneagles Kota Kinabalu, Gleneagles Medini and Acibadem Taksim hospital. Additionally, recent acquisitions of the India operations in both Continental (Mar 15) and Global Hospitals (Dec 15) also contributed to top-line growth. As of 31 Mar 16, India was IHH’s fourth largest market.

For 1Q16, inpatient volumes for Singapore and Malaysia increased 10.9% yoy and 9.6% yoy respectively, mainly driven by higher local patient admissions. In Turkey, inpatient admissions increased 16.9% yoy in 1Q16, largely driven by the ramp-up of Acibadem Atakent Hospital and contribution from newly-opened Acibadem Taksim Hospital in 2015.

More notably, 1Q16 revenue intensity for Acibadem and Malaysia grew 3.2% and 8.0% yoy respectively due to price increases to account for cost inflation as well as an increase in complex cases as IHH steps up effort to improve service competencies in these markets. Singapore, however, saw a flattish growth of 0.3% yoy, which we believe was due to higher local to foreign patient mix, where procedures for local patients generally fetch lower revenue intensity than those of medical tourists.

We reckon cost pressures are likely to remain high, underpinned by higher staff costs from wage inflation and higher minimum wage regulation in Turkey (effective 1 Jan 16), higher inventories and consumable costs from implementation of GST in Malaysia, and increased complex procedures undertaken.
Nevertheless, we expect IHH to offset the impact of these higher cost pressures through higher revenue intensity procedures, cost optimisation and tighter cost controls.

We understand three new hospitals are targeted to open in 2017 - Gleneagles Hong Kong, Parkway Hospital Chengdu and Acibadem Altunizade in Istanbul.
Meanwhile, amid concerns regarding a recent newsflow where politicians in Myanmar called for a stop to the Parkway Yangon hospital project, we understand from management that the project is still underway.

More recently, in April, Acibadem signed a definitive agreement to acquire Bulgaria-based Tokuda Group for RM286.1m while simultaneously acquiring approximately one-third stake in City Clinic from its existing operating partners for RM48.3m. Pending conditions precedent, the deal is expected to close within three months, following which Acibadem will be the leading private healthcare operator in Bulgaria with four hospitals totaling approximately 750 beds and 4 medical centres.

We raise our net profit forecasts for 2017-18 by 3% and 4% respectively to factor in higher top-line contributions from the new Bulgaria acquisitions.

Maintain HOLD with a higher target price of $2.09 (previously $2.07), based on our sum-of-the-parts (SOTP) model.
While we like IHH’s growth strategy and its geographically diversified revenue streams, we believe current valuation at 50.4x 2017F PE reflects that.
IHH is currently trading above the industry’s PE of 42.1x. Nevertheless, we think the group’s capacity in new markets such as Hong Kong, China and India will provide growth runway for the next 5-10 years.
Entry price is $1.90.
Key risks include:
1. execution risk,
2. forex risk,
3. inflationary pressures on operating expenses, and
4. competition.

Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-27

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