Health Management International (HMI) - Maybank Kim Eng 2018-05-11: Slight Beat From Robust Margins

HEALTH MANAGEMENT INTL LTD SGX: 588

Health Management International (HMI) - Slight Beat From Robust Margins

Health Management International (HMI)’s 3Q18 earnings were slightly above ours and consensus expectations due to better-than-expected gross margin expansion, at +4.0ppt y-o-y, driven by higher revenue intensity from higher ASP overseas patients and better cost management.
9M18 core earnings met 79% of our and 77% of consensus FY18E. Accordingly, we raised our FY18-20E EPS by 1-2%.
Core earnings grew 117%, mainly due to the full consolidation of minority interests from both hospitals. However, EBITDA, which excludes the consolidation impact, still rose by a robust 27% y-o-y. Expansion plans in both hospitals remain on track.

Maintain BUY and DCF-based Target Price of SGD0.80; we like the sustainable mid-teens earnings growth FY18-20E driven by a unique independent operating model.

We continue to see positive developments from three key drivers of the richer product mix/revenue intensity:
1. growth in foreign patient load continued to outpace the local patient;
2. inpatient and outpatient bill size grew 3.8% and 9.0% y-o-y in 3Q18; and
3. introduction of more new specialist consultants, including colorectal surgeon, radiotherapist, oncologist, urologist and neurologist.
In addition, HMI has repaid more than half of its SGD53m borrowings, used for consolidation of two hospitals in Mar 2017. HMI’s net debt has fallen to MYR25m, from MYR87m in FY17.

In Mahkota, the refurbishment of the old wards continued to progress smoothly, after the opening of a new ward. Also, the construction of a small extension is on track.
A notable development is direct flights from Medan to Malacca airport commenced a few weeks ago and this bodes well for increasing the volume of Indonesian patients.

Although construction of a new block is still in the approval process, HMI has obtained approvals for the land preparation phase and the work will commence soon. This will allow HMI to plan for the utilities and other configurations.
Management remains committed to start commissioning the new block in 2021.

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.

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 that 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 for and acquiring value-destroying businesses.

John Cheong CFA Maybank Kim Eng | https://www.maybank-ke.com.sg/ 2018-05-11

SGX Stock Analyst Report BUY Maintain BUY 0.800 Same 0.800