IHH Healthcare (IHH SP) - UOB Kay Hian 2017-08-24: 1H17 Earnings Miss On High Start-up Costs

IHH Healthcare (IHH SP) - UOB Kay Hian 2017-08-24: 1H17: Earnings Miss On High Start-up Costs IHH HEALTHCARE BERHAD Q0F.SI

IHH Healthcare (IHH SP) - 1H17: Earnings Miss On High Start-up Costs

  • IHH Healthcare's 1H17 adjusted core earnings fell 32% yoy, missing our and consensus estimates.
  • Pre-operating costs at new hospitals such as GHK were the main drags, offsetting top-line growth (10% yoy). That said, existing core markets registered good operating performance with higher inpatient volume and revenue intensity. 
  • Reduce 2017-19 earnings estimates by up to 30% to build in cost pressure. 
  • Maintain HOLD with a lower SOTP target price of S$1.73 (previously S$1.80). Entry price: S$1.50.



RESULTS


1H17 adjusted core earnings below our and consensus estimates. 

  • IHH Healthcare’s (IHH) 2H17 headline earnings increased 63% yoy to RM786.6m, mainly due to a RM555m gain from the disposal of Apollo Hospitals. 
  • Stripping out the exceptionals, 1H17 adjusted net profit would have seen a 32% yoy decline to RM288m. This is below our and consensus estimates, representing 31%/30% of our/consensus 2017 earnings forecasts.

Revenue grew on expansion ramp up... 

  • 1H17 revenue grew 10% yoy to RM5,456m as the group saw organic growth from existing operations and a continuous ramp-up in hospital openings in 2017 such as Gleneagles Hong Kong (GHK) as well as the Altunizade Hospital.

…but offset by start-up costs. 

  • Earnings were dragged as costs continued to outpace revenue growth. The decline in earnings was mainly due to higher depreciation (+15% yoy), finance costs (+140% yoy) and staff costs (+15% yoy), associated with the opening of new hospitals. 
  • As an indication, start-up costs at GHK had expanded to RM149.8m in 1H17, compared to just RM8.7m in 1H16. With several hospital projects still in the pipeline, and with three China hospitals coming on-stream in 2018-19, we expect cost pressure to remain elevated in the near- to mid-term.


STOCK IMPACT


GHK: Ramping up well, start-up costs elevated but tapering off. 

  • We understand GHK’s operations are ramping up nicely, with the hospital already taking on more complex cases only three months into its opening, faster than Mt E Novena when it first opened. As an indication, revenue intensity at GHK is tracking at RM28,447, relatively in line with Singapore’s (RM 29,161). 
  • While we understand start-up costs will remain elevated for FY17 considering all 500 beds were opened at one go instead of the usual phased fashion, we did see an encouraging 16.4% qoq decline in start-up losses at GHK in 2Q17 (1Q17: 81.1m v 2Q: RM 67.8m). 
  • Overall, we are optimistic that GHK will see a similar, if not a faster growth trajectory than Mt E Novena in Singapore, which turned EBITDA positive in less than a year. We estimate GHK would contribute 5% of group EBITDA for 2018.

Three China hospitals coming on-stream in 2018-19. 

  • IHH currently has three greenfield China projects coming on-stream from 2018-19; Gleneagles Chengdu (350 beds in 2018), Gleneagles Nanjing (70 beds in 2019) and Gleneagles Shanghai (450 beds in 2019). 
  • We believe near-term costs will remain elevated on pre-operating expenses, where we estimate new hospitals will take an average of 12-18 months’ runway before reaching EBITDA breakeven level. However, in terms of magnitude of start-up losses, we opine it may not be as steep as that of GHK since beds at these hospitals will be opened in phases.

Resilient operations across all core markets. 

  • Commendably, IHH recorded a resilient set of operational data for 1H17, where all core markets charted higher patient volumes as well as revenue intensity. 
  • For 1H17, the two largest markets, Singapore and Malaysia, recorded 3%/4% yoy increases in inpatient volumes while revenue intensity grew 6%/11% yoy respectively.

Singapore: Higher revenue intensity on continued growth in foreign patient revenue. 

  • Notably, the group continued to see higher foreign patient revenue, where IHH recorded a 15% yoy increase in revenue from Indonesian patients. This is commendable, given its peers are seeing a decline in foreign patients for 1H17. 
  • We believe this was due to the continued ramp-up of service offerings at the hospitals, which attract foreign patients who seek complex or high revenue intensity treatments. As such, for 1H17, we see revenue intensity in Singapore growing 6% yoy on the back of a complex case mix.


EARNINGS REVISION/RISK

  • Adjust 2017-19 earnings forecast downwards by up to 30% to build in higher cost assumptions, including higher staff, finance and depreciation cost. This reflects a ramp-up at new hospitals as well as start-up costs in lieu of the new hospitals coming on-stream in 2018-19.


VALUATION/RECOMMENDATION


Maintain HOLD with a lower SOTP target price of S$1.73 (previously S$1.80), rolled forward to 2018. 

  • We have rolled forward our valuation from 2017 to 2018, where valuations of IHH’s core businesses in Singapore, Malaysia, Turkey and India are pegged to EV/EBITDA multiple of 19x based on the sector average. Furthermore, we included the DCF-derived value of GHK to accurately capture the long-term contribution of the Hong Kong greenfield hospital. 
  • While we remain positive on the long-term prospects of IHH, given that is situated in growth markets in China, Hong Kong as well as India, we believe near-term earnings will be crimped on expansion plans. 
  • Entry price is S$1.50.
  • Key risks:
    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/ 2017-08-24
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.73 Down 1.800



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