Health Management International (HMI SP) - UOB Kay Hian 2017-08-25: FY17 Solid Results; Expect Momentum To Continue In FY18

Health Management International (HMI SP) - UOB Kay Hian 2017-08-25: FY17: Solid Results; Expect Momentum To Continue In FY18 HEALTH MANAGEMENT INTL LTD 588.SI

Health Management International (HMI SP) - FY17: Solid Results; Expect Momentum To Continue In FY18

  • Health Management International (HMI)'s FY17 adjusted core PATMI of RM32.1m (+40.3% yoy) is in line with estimates on a solid 10% yoy growth in revenue, buoyed by increased patient load and revenue intensity. 
  • Notably, despite the Hari Raya festival in June, the group still managed to deliver a commendable 4% yoy increase in patient load in 4QFY17. 
  • Meanwhile, we remain optimistic on Malaysia’s medical tourism outlook, where HMI saw foreign patient growth exceed local in 4QFY17. 
  • Maintain BUY. Target price: S$0.83.



RESULTS


FY17 adjusted core PATMI in line with our estimate. 

  • Health Management International’s (HMI) FY17 headline PATMI increased a mere 3% yoy to RM20.6m, but this is owing to non-recurring items such as forex losses, professional fees and other costs related to the consolidation transaction. 
  • Stripping out exceptionals, FY17 adjusted core PATMI of RM32.1m (+40.3% yoy) is largely in line, coming in just a slight 4% ahead of our full-year estimate.

Respectable 10% yoy revenue growth. 

  • FY17 revenue grew 10% yoy to RM435.8m, driven by healthy patient load and revenue intensity growth. 
  • We note that the group experienced two Hari Raya festivals in FY17 (16 July and 17 June), where patients usually tend to delay more complex procedures due to the fasting month. Despite this, the group still managed to deliver a commendable 9% yoy and 4% yoy increase in patient load in 1QFY17 and 4QFY17 respectively. 
  • Separately, we expect a strong 1QFY18, given patients who delayed procedures during the fasting month of June also tend to return in July.

Foreign patient volume continued to grow at both hospitals. 

  • In 4QFY17, foreign patient load growth (+8.5% yoy) outpaced that of local patients’ (+2.4% yoy). As a result, the foreign-to-local mix inched towards 23:77 (4QFY16: 22:78), where both Mahkota and Regency saw more foreign patients. We deem this as a positive sign that the continued development of centres of excellence as well as multi disciplines at both hospitals is bearing fruit. 
  • Furthermore, despite the quality and comprehensive range of disciplines available, the average bill sizes at both hospitals are only one-third of Singapore private healthcare costs, which we believe is a major pull factor for medical tourists.

We find Malaysia medical tourism attractive. 

  • We like Malaysia’s medical tourism for its stronger growth outlook, bolstered by favourable government initiatives, geographical proximity and cultural affinity to its largest market - Indonesia. 
  • Furthermore, we note that AirAsia is expected to commence direct flights to Jakarta, Vietnam and Guangzhou from Malacca in October, which in our view will offer further boost to the medical tourism growth for HMI’s Mahkota in the near term.

Slight net debt but manageable; dividend payout of 26%. 

  • As of end-FY17, the group had net debt of RM87m due to additional debt facility post consolidation of ownerships.
  • We anticipate leverage to be well managed, considering the group plans to pay down 50% of the acquisition debt by Dec 17 with internally generated cash. As at 30 Jun 17, the group had paid down some debt, which also saw gearing decline to 0.5x from 0.6x as at 31 Mar 17. 
  • The group also declared a final dividend of 1 sen, which represented 25.6% of FY17 core net profit.

Increased bed capacity in FY18 to drive patient load. 

  • We expect operational bed capacity at both hospitals to increase in FY18 with an additional 34 beds at each hospital.
  • This would help drive more inpatient load as well as allow hospitals to maintain an optimal occupancy level of 65-70%. 
  • Management also has plans to progressively add a further 40 beds to a target of 340 beds for Mahkota.

Hospital extension targeted to commission by FY21. 

  • We expect construction of the new hospital extension to commence in FY18 and likely be operational in FY21. The new block will add inpatient beds, clinic services, operating theatres as well as clinic suites for sale or for rental to doctors. 
  • Following which, Regency will become a 380-bed tertiary hospital with capacity to expand to 500 beds. Construction cost is projected at RM160m, and we estimate 75% to be debt funded.


EARNINGS REVISION/RISK

  • No change to earnings forecasts, introduce FY20F forecast. We project a 3-year FY18-20 EPS CAGR of 21.5%


VALUATION/RECOMMENDATION

  • Maintain BUY and DCF-based target price of S$0.83. 
  • Our target price is based on the following factors:
    1. explicit 2018-22F free cash flow forecast;
    2. terminal growth of 2.5% (in line with Malaysia’s 10-year long-term inflation rate); and
    3. WACC of 7.0%. 
  • HMI’s share price has declined 9% from its ytd peak and the stock is currently trading at 27x FY18F PE, a 23% discount to peers’ 35x. We do not think such a steep discount is warranted, given our strong FY18-20 EPS CAGR forecast of 22% vs peers’ 16%, buoyed by expansion plans as well as strong medical tourism prospects in Malaysia.




Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-25
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.830 Same 0.830



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