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IHH Healthcare - DBS Research 2016-07-04: Recreating the magic in Hong Kong

IHH Healthcare - DBS Research 2016-07-04: Recreating the magic in Hong Kong IHH HEALTHCARE BERHAD Q0F.SI 

IHH Healthcare - Recreating the magic in Hong Kong

  • Gleneagles HK leads IHH’s ‘Growth 2.0’
  • Medium-term growth from new hospitals
  • Limited downside risks
  • Upgrade to BUY, TP of RM7.60



Gleneagles Hong Kong leads IHH’s ‘Growth 2.0’. 

  • The long awaited Gleneagles HK, targeted to open by Jan 2017 leads IHH into its next phase of growth. 
  • We are positive on the prospects of Gleneagles HK and believe the positive impact could be double that of Mount Elizabeth Novena (Mt E Novena), given that Gleneagles HK is more than double the size of operational beds in Mt E Novena (500 beds in Gleneagles HK versus 180 operational beds in Mt E Novena).


Medium-term growth from new hospitals, China and India. 

  • Management targets to add c.1k (includes Gleneagles HK) new beds by end-2017, with the opening of two other hospitals in 2017. 
  • Subsequently, IHH plans to further expand its footprints in China (ParkwayHealth Shanghai Hospital by 2020) and in India (via its newly acquired Global and Continental Hospitals). 
  • However, we believe these new hospitals would start contributing significantly post-2022 (when they stabilise).


Limited downside risks. 

  • While we believe that earnings growth could moderate in the near term due to 
    1. start-up/pre- operating costs of new hospitals, and 
    2. macro-economic headwinds, 
    we believe downside risks are limited as the healthcare sector remains resilient amid market uncertainties. 
  • In addition, foreign shareholdings have fallen to IPO levels at 21%. 
  • We believe any share price weakness offers a good entry opportunity for medium- to long-term growth prospects.


Valuation:


Upgrade to BUY, TP of RM7.60. 

  • We upgrade our rating to BUY (from HOLD) with a revised TP of RM7.60/S$2.51 (from RM6.33/S$2.09) by including the DCF valuation of Gleneagles HK and raising the EV/EBITDA multiples of Malaysia and Turkey as the operations in these markets mature. 
  • IHH trades at FY17F EV/EBITDA of 22x, close to the historical average of 21x, in line with regional peers.


Key Risks to Our View:

  1. Economic slowdown; 
  2. lower-than-expected performance, especially in new markets; 
  3. higher-than-expected start-up and pre-operating costs; and 
  4. government policy changes.




Rachel Lih Rui Tan DBS Vickers | Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-07-04
DBS Vickers SGX Stock Analyst Report BUY Upgrade HOLD 2.51 Up 2.09


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