IHH Healthcare Bhd - CIMB Research 2017-08-23: 2Q17 Home Advantage Masked By Start-up Costs

IHH HEALTHCARE BERHAD Q0F.SI

IHH Healthcare Bhd - 2Q17 Home Advantage Masked By Start-up Costs

IHH Healthcare's 1H17 EBITDA of RM1101m in line; 1H17 core PATMI was 32% of our FY17 forecast, deemed a miss due to GHK start-up costs and unfavourable FX translation effects.
Gleneagles HongKong (GHK) saw narrowing 2Q17 EBITDA losses, on track for FY18 breakeven.
Core markets like Singapore and Malaysia saw both topline and EBITDA growth, thanks to better performing Novena and 3 new hospitals in Malaysia.

Acibadem’s EBITDA decline was hit by FX translation, but it still saw a good ramp-up in new hospitals.
Maintain Add with higher SOP-based TP of RM6.99. Poor GHK execution is key risk.

IHH reported 2Q17 PATMI of RM317m, above our/consensus expectations.
Excluding RM230m of exceptional items (mainly from gains on the disposal of its Apollo stake), it would have been a big miss, which we attribute to higher gestation costs in Hong Kong (HK), additional financing expenses and unfavourable FX translation effects. 1H17 EBITDA of RM1101m formed 48% of our FY17 forecasts.

IHH’s major operating markets like Singapore and Malaysia continued to exhibit resilient operational performance in 2Q17, growing 10% and 15% yoy, respectively, for topline, and 12% and 20% yoy, respectively, at the EBITDA level.
India was a slight disappointment with 2Q17 EBITDA dropping 42% yoy due to the recruitment of new consultants, despite revenue improving 31% yoy. We do not see this as a major concern given its relatively small earnings contribution and longer-term story.

A big reason why we are bullish on IHH is because we believe in management's ability to execute in Hong Kong. Recall that GHK opened only in Mar 17 but we are already seeing positive revenue contribution and narrowing EBITDA losses to RM72m in 2Q17 (1Q: RM85m).
Management also shared that ASPs in GHK are very close to Singapore levels, which is impressive given that GHK just opened. We expect IHH to achieve EBITDA breakeven by FY18.

Both inpatient volume and average inpatient revenue for Singapore were up 1.3% and 8.7% yoy, respectively, thanks to stronger operating leverage at Novena, which is at 65% occupancy level on average and due to open 1 more ward (c.30 beds) in 2H17.
Management sees an uptick in Indonesian patients for both Singapore (+15% yoy YTD) and Malaysia (mainly from Sumatra).

Acibadem's headline numbers (2Q17 EBITDA of RM145m, -9% yoy) were perhaps the biggest negative surprise this quarter but this was mostly due to FX translation. Core revenue (+26% yoy) and EBITDA (+4% yoy) numbers on a constant currency basis were actually much better.
An even bigger positive is the strong ramp-up in the new Acibadem Taksim and Altunizade (opened Mar 17) hospitals, with inpatient volumes up 40.4% yoy and average inpatient revenue up 4.0% yoy.

As we tweak our forecasts for higher financing and depreciation costs, our FY17-19F EPS fall by 2-8%. Our SOP-based TP (RM6.99) is now higher upon factoring in the proceeds from the Apollo stake divestment; maintain Add.
IHH's share price could stay range-bound on gestation for new hospitals, but we still like IHH for its established geographical presence in key populous countries, proven track record and strong brand equity.

NGOH Yi Sin CIMB Research | http://research.itradecimb.com/ 2017-08-23

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 6.99 Up 6.84