IHH Healthcare - DBS Research 2016-11-25: New hospitals to drive long term growth

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IHH HEALTHCARE BERHAD Q0F.SI

IHH Healthcare - New hospitals to drive long term growth

• 3Q16 below expectations on higher expenses.
• Revenue growth remains strong (3Q16 +18%).
• Potential impact from depreciation of Turkish Lyra and MYR, partially mitigated by stronger SGD against MYR.
• TP lowered to RM7.15.

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

• The long awaited Gleneagles HK, targeted to open by March / April 2017 is on track. We remain positive on the prospects of Gleneagles HK. 
• New hospitals targeted to open in 2017 are on track as well - Acibadem Altunizade in early 2017, and Parkway Hospital in Chengdu by the end of 2017. We believe IHH Healthcare (IHH)’s medium-term growth will likely be contributed by new hospitals largely in China and India. 
• Management intends to add c.1,000 new beds (includes Gleneagles HK) by the end of 2017.

9M16 results below expectations. 

• IHH’s core net profit (excluding forex and one-off gains) fell 6% y-o-y to RM643m, largely due to higher operating expenses, resulting in a compression of core EBIT margins from 17% in 9M15 to 14% in 9M16. 
• Key positives: 
  1. strong revenue growth, 
  2. lower start-up costs from new hospitals in Malaysia, and 
  3. Malaysia has picked up. 
• Key negatives: 
  1. margin compression, 
  2. higher preoperating costs, and 
  3. depreciation of Turkish Lyra and MYR.

Near term startup costs, but longer term prospects positive. 

• 3Q results confirm our view that near term earnings growth could moderate due to : 
  1. start-up/pre-operating costs of new hospitals, and 
  2. macroeconomic headwinds. 
• That said, revenue growth still remains resilient amid market uncertainties. We believe any share price weakness offers a good entry opportunity for medium- to long-term growth prospects. 
• We like IHH for its geographical diversification and recognised presence as a premium healthcare player.

Valuation

• We maintain our BUY rating with TP of RM7.15, based on SOTP valuation methodology. 
• Key catalysts are 
  1. positive performance and shorter-than-expected gestation period of Gleneagles HK and the other new hospitals, 
  2. better-than-expected performance despite macroeconomic headwinds, and 
  3. positive developments in new markets, such as India.

Key Risks to Our View

1. Economic slowdown; 
2. lower-than-expected performance, especially in new markets; and 
3. government policy changes.

Rachel Lih Rui Tan DBS Vickers | Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-11-25

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 7.15 Down 7.600