IHH Healthcare (IHH SP) - UOB Kay Hian 2017-05-23: Decent Operations Watered Down By Cost Pressure

IHH HEALTHCARE BERHAD Q0F.SI

IHH Healthcare (IHH SP) - Decent Operations Watered Down By Cost Pressure

1Q17 adjusted earnings fell 15% yoy (in line with our estimates), as top-line growth was offset by start-up costs from new hospitals, Gleneagles Hong Kong and Acibadem Altunizade, which opened in Mar 17.
That said, IHH posted commendable operational stats, which saw inpatient volume and revenue intensity grow across all four home markets.
While we like IHH for its expansion plans and long-term growth outlook, we believe current valuation at 53x (v peers 40x) has already reflected that.

Post the 1Q17 results, we had a discussion with IHH Healthcare (IHH) to find out more about key operational performances in its core markets as well as updates on the recently-opened Gleneagles Hong Kong.

IHH’s 1Q17 headline net profit doubled to RM470.0m, largely due to RM313.4m gain from the group's divestment of a non-core 6.07% stake in Apollo Hospitals. Excluding the exceptional items, adjusted net profit would have dipped 15% yoy to RM201.8m, but largely in line with our estimates (21% of FY17 estimates).
Top-line grew 8% yoy to RM 2.7b on the back of organic growth from existing operations and the continuous ramp-up of hospitals opened in 2015, such as Gleneagles Kota Kinabalu and Gleneagles Medini. Meanwhile, newer acquisition such as Tokuda and City Clinic Group in Bulgaria also started contributing to revenue.

Cost continued to be a drag on earnings, mainly due to pre-operating expenses of new hospitals. More notably, start-up costs at Gleneagles HK (GHK) has expanded to RM81m in 1Q17, compared with RM6m in 1Q16.
We expect near-term cost pressure to remain a headwind in 2017, as the group embarks on new expansion projects as well as ramps up on existing ones.

Opened only on 21 March, operations at GHK are still in early phase, where the hospital is currently doing more of day surgeries and simple procedures. We believe GHK will gradually ramp up with higher intensity procedures towards the second half of the year, where utilisation will likely pick up. Given that all 500 beds came on-stream as opposed to the typical phased operations, we believe start-up costs are likely to remain elevated over the next two quarters, possibly tracking along similar quantum as 1Q17 (RM81.1 m).
Nevertheless, we expect GHK to benefit from HK’s bed crunch situation, where we would not be surprised if the hospital follows a similar, if not faster, growth trajectory as MT E Novena in Singapore, which turned EBITDA positive in less than a year.
We expect GHK to contribute more significantly in 2018.

While costs continued to erode earnings, IHH charted a respectable set of operational performance in 1Q17, recording increased inpatient volume as well as revenue intensity across all home markets.
Specifically, the two largest markets Singapore (82% of core earnings) and Malaysia (34% of core earnings) recorded increase in inpatient volumes of 4%/3% while revenue intensity grew 3%/11%, respectively.

Singapore delivered a strong performance, where 1Q17 core earnings grew 10% yoy, supported by growth in patient volumes (+4% yoy) and revenue intensity (+3%). While inpatient volumes were largely driven by local patients (68-70% of load), a positive surprise was the group actually saw an increase in foreign patients for this quarter.
Notably, Indonesian patients recorded a 12% yoy increase in revenue, where the group is also seeing growth from Filipino patients.
In our view, this is commendable, especially given its peers are seeing decline in foreign patients for 1Q17, and also given a typically low season period due to festivities and holidays.

Second largest market Malaysia grew its 1Q17 core earnings by 30% yoy where both inpatient volumes (+3% yoy) and revenue intensity (+11% yoy) saw increase. 1Q17 saw a double-digit growth in foreign patients for Malaysia, which we believe could be due to the positive government initiatives to boost medical tourism, as well as ramp-up of centres of excellence at the group’s hospitals.
With a total of 14 hospitals across the country as well as staggered expansion plans in the pipeline for 2017/2018, we believe the group is well-positioned to benefit from the growing population as well as the medical tourism trend in the country.
Management is also not ruling out potential M&As in Malaysia.

Adjust 2017-19 earnings downwards slightly by 4-6% to reflect higher start-up costs.

Maintain HOLD with a lower target price of S$1.80 (previously S$1.85), based on our sum-of-the-parts (SOTP) model.
Our lower target price reflects the adjusted earnings and the disposal of the group’s 6.07% interest in Apollo Hospital (initially 11.2%).
While the group’s capacity in new markets such as Hong Kong, China and India will provide growth runway for the next 5-10 years, we believe the current valuation at 52.5x 2017F PE reflects that. IHH is currently trading above the industry’s 39.6x PE. Entry price is S$1.60.
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/ 2017-05-23

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.80 Down 1.85