Health Management Int’l (HMI SP) - Maybank Kim Eng 2018-02-14: Robust Margins Expansion And NDR Takeaways

Health Management Int’l (HMI SP) - Maybank Kim Eng 2018-02-14: Robust Margins Expansion And NDR Takeaways HEALTH MANAGEMENT INTL LTD 588.SI

Health Management Int’l (HMI SP) - Robust Margins Expansion And NDR Takeaways


Revenue intensity lifted margins; positive NDR 

  • Health Management International's 2Q18 results in line, 6M18 core earnings met 53% of our FY18E. EBITDA grew 23% y-o-y, mainly due to margins expansion from higher revenue intensity and better cost management. 
  • Key takeaways from NDR:
    1. margin expansion will continue from more subspecialties, foreign patients and better cost synergies after consolidation;
    2. continued expansion from hospital extensions and current space optimisation; and 
    3. continue to differentiate to maintain competitiveness. 
  • Maintain BUY and DCF-based Target Price of SGD0.80; we like the sustainable mid-teens earnings growth driven by a unique independent operating model.


Better revenue intensity and cost management 

  • Gross margin expanded 4.4ppt y-o-y to 36.9% in 2Q18, its highest level ever achieved due to higher revenue intensity and effective cost management after the full consolidation of minority stakes since 4Q17.
  • Key drivers for higher gross margin include:
    1. foreign patients load continued to outpace local patient, foreign patients typically have higher bill size;
    2. Inpatient and outpatient bill size continued to grow, supported by higher intensity from introduction of more new specialist consultants; and
    3. improved cost management by combining purchases of both hospitals and renegotiated price terms with key suppliers.


Continued expansion of existing hospitals 

  • HMI remains committed to expanding both of its existing hospitals.
  • Mahkota has opened a new ward and will be adding a small extension to its building to allow more space for its radiology and other departments. The new ward enables Mahkota to close and refurbish older wards, while the extension is expected to be completed at the end of 2018. 
  • For Regency, the new extension block, which could more than double its capacity, is in the regulatory approval process.


Differentiating factors 

  • HMI seeks to differentiate itself from its peers by providing more comprehensive and complex treatments. 
  • In Regency, it is the first hospital to launch ECMO (Extracorporeal Membrane Oxygenation) Therapy, outside of KL and Singapore. 
  • For Mahkota, it is the only hospital with a PET (Positron Emission Tomography) scanning machine in Malacca.


Results overview 

  • 2Q18 results were in line, 6M18 core earnings met 53% of ours and 52% of consensus FY18E. Core PATMI grew 111%, mainly due to the full consolidation of minority interests from both of HMI’s hospitals. However, EBITDA, which excludes the consolidation impact, also grew a robust 23% y-o-y.
  • HMI also announced a new dividend policy of at least 20% of core earnings and paid a maiden dividend of MYR1 cent per share.
  • Gross margin expanded 4.4ppt y-o-y to 36.9% in 2Q18, its highest level ever, due to higher revenue intensity and effective cost management. 
  • We continue to see positive developments in three key drivers of revenue intensity:
    1. foreign patients increased to 2ppt y-o-y to 23% of total in 2Q18, growth in foreign patient load continued to outpace the local patient;
    2. Inpatient and outpatient bill size grew 3.6% and 10.9% y-o-y;
    3. introduction of more new specialist consultants including anaesthesiology, cardiology, internal medicine, urology and neurosurgery.



Swing Factors


Upside

  • M&A of synergistic businesses; HMI is actively exploring M&A targets to scale up its operations; it is studying nearby markets, including Malaysia and Indonesia.
  • Better-than-expected revenue and earnings growth from higher patient volume, pricing and operating leverage.
  • Better-than-expected revenue from medical tourists, due to weaker MYR relative to other currencies.

Downside

  • Competition from nearby hospitals in Johor and Malacca.
  • HMI could be competing for good doctors and patients.
  • Also, Johor has several new hospitals coming up.
  • Regulatory changes to cap the medical-related fees and relax the practice requirement of foreign doctors could impact private hospitals.
  • Pursuing M&A at unfavourable terms, such as overpaying and acquisition of value-destroying businesses.








John Cheong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-02-14
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.800 Same 0.800



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