IHH Healthcare - DBS Research 2017-08-24: Progressing As Planned

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IHH HEALTHCARE BERHAD Q0F.SI

IHH Healthcare - Progressing As Planned

• 1H17 earnings up 63% y-o-y on disposal gains.
• EBITDA (ex-PLife REIT) margins fell to 20% vs 24% in 1H16.
• Gleneagles HK undertaking complex cases; Altunizade is EBITDA positive at the expense of 2 existing hospitals.
• Start-up costs / losses starting to narrow.

WHAT’S NEW

Progressing as planned 1H17 net profit up 63% y-o-y on disposal gains. Core net profit fell 32% largely due to pre-operation / startup costs. 

• IHH’s 1H17 net profit +63% y-o-y to RM787m, 76% of street’s FY17F estimates, largely due to the recognition of RM555m gain from disposal of its 10.85% stake in Apollo Hospitals. 
• Excluding exceptional items, core profit fell 32% y-o-y to RM288m (28% of street’s and 29% of our FY17F estimates) due to pre-operation / start-up losses from the opening of Gleneagles HK (RM150m), and lower EBITDA on a blended basis of 3 hospitals (more details below – comments on Turkey) including the newly opened Acibadem Altunizade Hospital as both hospitals commenced operations in Mar 2017, higher depreciation (+15% y-o-y) and finance costs (+140% y-o-y) mainly due to the opening of both hospitals, and forex losses of RM115m vs forex gain of RM2m in 1H16.
• 2Q17 net profit increased 29% y-o-y to RM317m mainly from the RM241m gain from disposal of its remaining 4.78% stake in Apollo Hospitals. Core profit halved y-o-y to RM86m, largely from start-up losses from the opening of Gleneagles HK (RM68m), lower EBITDA on a blended basis of 3 hospitals (more details below – comments on Turkey) including the newly opened Acibadem Altunizade Hospital, higher depreciation (+23% y-o-y) and finance costs (+113% y-o-y) mainly due to the recent opening of both hospitals, forex losses of RM 21m vs forex gain of RM8m in 2Q16, and higher taxes from a one-off tax provision in relation to prior-year’s tax adjustments.

Revenue growth boosted by the ramp-up of newer hospitals. 

• The group posted 10% y-o-y revenue growth in 1H17 (14% growth on a constant currency basis). All business units posted positive growth, partially boosted by contributions from the ramp-up of Mount Elizabeth Novena Hospital and hospitals which opened in 2015 such as Gleneagles Kota Kinabalu, Gleneagles Medini and Acibadem Taksim, and new hospitals such as Gleneagles HK and Acibadem Altunizade Hospital. 
• While inpatient admission volumes recorded muted growth in Singapore (+1.3%) and Malaysia (+4.8%), average revenue per inpatient admission improved led by higher revenue intensity.

EBITDA margin compressed from start-up costs but this is narrowing. 

• 1H17 EBITDA (excluding PLife REIT) fell 8% (- 5% on a constant currency basis) largely due to the start-up costs, with margins dropping further to 17% in 2Q17 from 18.7% in 1Q17 (4Q16: 18.3%; 2Q16: 20.1%). EBITDA margins (excluding new hospitals) fell to 20% in 2Q17 from 22.5% in 1Q17 and 21.1% in 2Q16. 
• The lower margins were partly impacted by the decantation of some of its patients with more complex medical conditions from 2 existing hospitals, Acibadem Kadikoy Hospital and Acibadem Kozyatagi Hospital to Acibadem Altunizade Hospital.
• We estimate that margins could stabilise or potentially improve gradually (depending on the speed of ramp-up) as start-up costs from Gleneagles HK and Acibadem Altunizade Hospital has narrowed (more details below – comments on Turkey), assuming ceteris paribus. In the first full quarter that Gleneagles HK was fully operational, losses narrowed to RM68m in 2Q17 from RM82m in 1Q17. 
• While Acibadem Altunizade Hospital turned EBITDA positive following the transfers of patients from 2 other existing hospitals as mentioned above, on a blended basis, EBITDA dropped from RM21.4m in 1Q17 to RM20.1m in 2Q17.

Singapore – Upward trend in revenue from Indonesian patients; higher intensity; Mount Elizabeth Novena continues to see high volumes. 

• In 2Q17, Singapore operations posted revenue growth of 10% on the back of 1% higher inpatient admissions and 9% improvement in Average Revenue per Inpatient Admissions (ARPIA) following higher intensity cases. 
• Similar to 1Q17, revenue from Indonesian patients continued to grow (1H17 +15% y-o-y) despite lower volumes largely due to the higher complexities. Hence, EBITDA grew 19% y-o-y. 
• On a constant currency basis, revenue rose 7.5% y-o-y while EBITDA grew 16%. In addition, management indicated that Mount Elizabeth Novena continues to see high volumes with occupancy rate at 65% to 80% on weekdays. The hospital will likely open up the remaining beds by 3Q17.
• In 1H17, revenue rose 7% y-o-y while EBITDA was 15% y-o-y higher. EBITDA margin improved to 27% vs 25% in 1H16.

Malaysia – 3 newer hospitals have turned EBITDA positive; growth seen in higher intensity cases, led by Indonesian patients. 

• Malaysia registered robust revenue growth of 15% y-o-y in 2Q17 to RM455m, driven by 5% increase in patient admissions and 10% improvement in ARPIA to RM6,548, led by higher revenue intensity. The 3 hospitals, namely Pantai Hospital Manjung, Gleneagles Kota Kinabalu Hospital and Gleneagles Medini Hospital, have turned EBITDA positive. Similar to Singapore, the Malaysian hospitals saw an increase in revenue from Indonesian patients.
• In 1H17, revenue rose14% y-o-y while EBITDA was 21% y-oy higher. EBITDA margin improved to 28% from 26% in 1H16.

Hong Kong – Gleneagles HK accepting more complex cases; start-up losses narrowed q-o-q. 

• Gleneagles HK achieved revenue of RM14.8mn and ARPIA of RM28k, similar to Singapore’s ARPIA of RM29k since it started operations.
• The hospital has yet to breakeven, recording a loss at EBITDA level of RM68m, but we note that the loss has narrowed compared to 1Q17’s pre-operation losses of RM82m. This was expected with costs offset by higher revenues.
• Management is encouraged that the hospital has already undertaken more complex surgeries in lungs, liver and cardiac specialties. Moreover, management continues to see good traction in its outpatient volumes which could potentially drive inpatient volumes.

Turkey – margins fell on higher start-up costs; Acibadem Altunizade turned EBITDA profitable.

• Acibadem’s revenue grew 10% y-o-y in 2Q17, which was more muted growth compared to historical growth largely due to higher translation forex losses. On a constant currency basis, revenue grew 26% y-o-y with contributions from Tokuda Group and City Clinic Group in Bulgaria which were acquired in June 2016, and organic growth from the newer hospitals, partially offset by higher translation forex losses. Inpatient admissions grew 40% while APRIA increased 4%.
• EBITDA dropped by 9% mainly due to the weaker Turkish Lira (TRY). On a constant currency basis, EBITDA was up 4% y-o-y. EBITDA margins fell by 3.2 ppts to 15%, partially due to lower higher start-up costs from the new hospital.
• Acibadem Altunizade Hospital saw strong demand, achieving 55% to 70% occupancy rate on 220 operational beds. It was EBITDA positive in the first quarter of operations mainly due to the decantation of patients with more complex cases from 2 other existing hospitals, namely Acibadem Kadikoy Hospital and Acibadem Kozyatagi Hospital as part of management’s strategy in positioning Acibadem Altunizade as a high-spec, highly specialised hospital. 
• On a blended basis (3 hospitals), we note that the drop in EBITDA (due to start-up costs) has been marginal, with EBITDA of RM20m in 2Q17 vs RM21m in 1Q17.

India – strong growth. 

• India operations continued to post strong revenue growth of 31% y-o-y in 2Q17, albeit small in terms of percentage contribution to group revenue. This was despite headwinds from pricing caps imposed by the government, hence ARPIA recorded muted growth of 0.7% y-o-y, mitigated by higher inpatient volumes (+15%). However, EBITDA fell 42% y-o-y in 2Q17 following the rampup of Global Hospital with the hiring of a top heart transplant surgeon. 
• 1H17 revenue rose 29% y-o-y while EBITDA increased 41% y-o-y.

Outlook 

Acquisition of Angsana Holdings Pte Ltd. 

• In July, IHH via Parkway Pantai acquired a 55% stake in Angasa Holdings Pte Ltd, a molecular diagnostic test services (including biochemistry, chemistry, haematology and molecular blood analysis and testing for S$9.3m (RM29.3m). 
• While the acquisition may be small, we believe this provides a platform for IHH to continue to grow its technology and to ensure that it can provide state-of-the-art technology especially in high margin diagnostic services.

Target completion for Gleneagles Shanghai brought forward to 2019. 

• Following the ground breaking ceremony held for Gleneagles Shanghai Hospital in June17, we note that IHH has brought forward its target completion date for the hospital to 2019 from 2020. 
• Management believes they will be able to meet the new target given the progress of construction works. This would enable the hospital to ride on the accelerated development in the surrounding area.   

Valuation

Maintain BUY, lower TP to RM6.81. 

• We maintain our BUY rating but lower our TP to RM6.81 from RM7.15 mainly to factor in a higher start-up costs from the 2 new hospitals, Gleneagles HK and Acibadem Altunizade Hospitals, and incorporating the impact of the USD500 senior perpetual securities issued in July17. 
• We raised our FY17F earnings by 4% to factor in gain from disposal of its stakes in Apollo Hospital, offset by higher start-up costs. 
• We lower our FY18F earnings by 26%, incorporating higher start-up costs, hence lower EBITDA margin of 22.4% vs 22.7% previously, and coupon paid for the perpetual securities issued.
• Potential catalysts are

1. positive performance and shorter-than-expected gestation period from Gleneagles HK and the other new hospitals,
2. better-than-expected performance from existing operations despite macroeconomic slowdown, and
3. positive developments in new markets such as India.

Where we differ. Gleneagles Hong Kong leads IHH’s ‘Growth 2.0’. 

• We believe Gleneagles HK, opened in Mar 2017, will lead IHH into its next phase of growth, a view the market may not be convinced of just yet. 
• With start-up losses starting to narrow from 2Q17 onwards coupled with early encouraging signs, we believe start-up losses from Gleneagles HK would start to moderate from 2H17 as revenue picks up.

Potential catalysts: Shorter gestation period for new hospitals / organic growth / new brownfield or greenfield hospitals.

1H17 earnings up 63% y-o-y on disposal gains. 

• IHH’s 1H17 net profit rose 63% y-o-y to RM787m, forming 76% of street’s FY17F estimates, largely due to the recognition of RM555m gains from disposal. Core profit fell 32% y-o-y to RM288m due to start-up losses. 
• Key positives:
  1. growth in all markets,
  2. startup costs / losses have narrowed, and
  3. revenue from Indonesian patients continue to grow. 
• Key negatives:
  1. lower overall (ex-PLife REIT) margins, and
  2. weaker Turkish Lira and MYR.

Key Risks to Our View

1. Economic slowdown;
2. lower-than-expected performance, especially in new markets;
3. government policy changes; and 
4. potential acquisitions that may moderate earnings growth in the near term.

Rachel Lih Rui Tan DBS Vickers | Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2017-08-24

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 6.81 Down 7.150