Health Management International - CIMB Research 2017-05-14: 3Q17 Hit By One-Offs

Health Management International - CIMB Research 2017-05-14: 3Q17 Hit By One-Offs HEALTH MANAGEMENT INTL LTD 588.SI

Health Management International - 3Q17 Hit By One-Offs

  • Excluding one-offs, 3Q/9M core PATMI was above expectations at 23%/71% of our full-year numbers, as we expect full earnings contribution in 4Q17 (without MI).
  • We saw improvement in both patient load (+1.4% yoy) and average bill sizes (+5.5% yoy) in 3Q17, driven by higher revenue intensity cases.
  • Strong operating cashflow (9M17: RM68m) to pare down 0.6x current net gearing.
  • Maintain Add with higher TP of S$0.83 (DCF; 7% WACC) on higher EPS estimates.

One-offs in 3Q17; expect a stronger 4Q17 

  • HMI reported negative PATMI of RM1.2m in 3Q17 (3Q16: RM8.7m), as exceptional items such as FX loss of RM1.4m and professional fees of RM7.3m weighed on overall profitability. Excluding these, 3Q/9M core PATMI was up 11.4%/28.0% yoy. 
  • We deem the results above, at 23%/71% of our full-year forecasts as we estimate minimal earnings dilution in 4Q17 given the completed consolidation of minority interests.

Higher average bill sizes underpinned by more complex surgeries 

  • Operational statistics at both hospitals, Mahkota Medical Center (MMC) and Regency Specialist Hospital (RSH) continue to be healthy, in terms of patient load (+1.4% yoy) and average bill sizes for inpatient (+5.9% yoy) and outpatient (+6.7% yoy). 
  • 3Q/9M17 overall revenue for HMI rose 6.7%/11.1% yoy. The increase in inpatient and outpatient average bill sizes was primarily led by higher revenue intensity cases and more complex surgeries, as the anticipated fee hike in 3Q17 has been postponed.

Healthy demand from local patients and medical tourists 

  • Both local and foreign patients contributed to the healthy volume growth, as the patient mix remains largely unchanged for MMC and RSH. However, we saw slightly smaller inpatient load of 11.4m in 3Q17 (vs. 3Q16’s 11.5m), offset by stronger outpatient numbers of 99.1m (3Q16: 97.5m). This could be attributable to 
    1. patients opting for more day surgeries, and 
    2. possible delays in seeking medical treatment, which suggests that patients could return in subsequent quarters.

Prepping for near-term capacity expansion 

  • HMI’s 3Q17 bed occupancy (based on midnight consensus) improved to 63% from 59% in a seasonally weaker 2Q17, but was weaker as compared to 3Q16’s 68%, mainly because of the increase in operational beds. However, bed occupancy at MMC and RSH was higher during the day; hence, each hospital is expected to add 30 new beds by FY18. 
  • Recruitment and training of nurses have been planned ahead, resulting in the slight dip in 3Q17 gross margin to 31.9% (3Q16: 33.7%, 2Q17: 32.5%).

Not overly concerned with temporarily higher leverage 

  • With the drawdown of RM171m debt (S$53m at 5.25%) to partially finance the acquisition of minority interests, HMI’s net gearing climbed to 0.61x as at end-9M17 vs. a net cash position as at end-1H17. 
  • We believe management will be able to pare down 50% of such debt by Dec 17 with internally-generated cash. 
  • We lower our FY18-19F finance costs (offsetting marginally higher admin expenses) and FY17F tax rate, lifting our FY17-19F core EPS by 0.5-4.7%.

Maintain Add 

  • Our DCF-based target price rises to S$0.83 (7% WACC), and we maintain Add on HMI.
  • Potential catalysts are stronger-than-expected earnings and earnings-accretive M&As, while unfavourable FX changes and weaker patient volumes could pose downside risks to our Add call.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-05-14
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.830 Up 0.810