IHH Healthcare - UOB Kay Hian 2016-08-26: 1H16 Earnings Falter On Cost Pressure

IHH HEALTHCARE BERHAD Q0F.SI

IHH Healthcare (IHH SP) - 1H16: Earnings Falter On Cost Pressure

IHH’s 1H16 adjusted earnings track below our and consensus forecasts.
While revenue growth remained healthy, underpinned by growth in inpatient volumes and revenue intensities across most home markets, earnings were dragged by start-up costs in new hospitals and higher staff costs.

We lower our FY16-17 net profit estimates by 6-12% to account for higher operating costs.
Maintain HOLD with a lower SOTP target price of S$2.14 (previously S$2.31). Entry price: S$1.90.

IHH Healthcare’s (IHH) 1H16 net profit grew 21% yoy to 481.6m due to exceptional gains of RM55.6m (RM54.8m arising from the group’s divestment of its 90% stake in Shenton Insurance as well as forex gains of RM7.5m on net borrowings).
Excluding exceptional items, adjusted net profit of RM426m (-8% yoy) would have tracked below our expectation, representing 40% of our full-year estimate.

While revenue increased 21% yoy to RM4.9b on the back of overall growth in inpatient volumes and revenue intensities across key markets, earnings were impacted by start-up costs from the new hospitals in Malaysia (RM 7.6m), pre-opening expenses for Gleneagles Hong Kong hospital (RM8.7m) which is slated to open in early-17, as well as higher operating and staff costs.
Additionally, earnings saw further downside due to depreciation from new hospitals, forex losses as well as higher net financing costs.
Nevertheless, we expect IHH to offset the impact of these higher cost pressures through higher revenue intensity procedures, cost optimisation and tighter cost control.

With regards to the recent military coup as well as political unrest in Turkey, we see limited impact on IHH’s earnings.
- First, Acibadem accounts for only about 10% of group net profit.
- Second, we believe the impact on Turkish operations remains muted as local patient inflow remains largely intact.
While we expect medical tourist inflow to be reined in, medical tourists comprise only 7-8% of Acibadem’s revenue and 2-3% of group revenue. In 2Q16, inpatient admissions in Turkey grew 16% yoy.

In 2Q16, Malaysia inpatient volume was largely flat yoy (-0.4%) at 47,067, which we believe was due to a slowing economy, underpinned by a weaker ringgit and the GST impact. The consolation is that revenue intensity remained fairly strong (+5.5% yoy) due to more complex cases as well as price adjustments for cost inflation.
In Singapore, inpatient volumes increased 7.5% yoy, supported largely by the inflow of local patients. This also explains the flattish revenue intensity growth in Singapore (-0.4% yoy) owing to a higher local patient mix.

We estimate pre-operating expenses for Gleneagles Hong Kong at RM5.1m for 2H16 leading to early-17.
In terms of securing doctors for the hospital, we understand that clinical collaborative partner Hong Kong University will provide up to 45 Chief of Specialty doctors. In terms of wider doctor recruitment, the group has accredited more than 100 specialists.

We lower our net profit forecasts for 2016-17 by 6% and 12% respectively, factoring in higher wage costs to meet higher staffing requirement, higher pre-operating expenses for Gleneagles Hong Kong and higher start-up costs from new hospitals.

Maintain HOLD with a lower target price of S$2.14 (previously S$2.31), 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 44.9x 2017F PE reflects that. IHH is currently trading above the industry’s PE of 34.6x.
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/ 2016-08-26

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 2.14 Down 2.310