Health Management International - UOB Kay Hian 2018-08-29: FY18 Broadly In Line; Solid Execution, Awaiting Long-term Prospects

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Health Management International (HMI SP) - FY18: Broadly In Line; Solid Execution, Awaiting Long-term Prospects

Health Management International’s (HMI) FY18 core PATMI RM62.2m (+90.5% y-o-y) was broadly in line with our estimate on solid 7.3% y-o-y growth in revenue. This was supported by increased outpatient load and revenue intensity.
While HMI’s Regency hospital extension and its ambulatory care acquisition will take some time to bear fruit, its execution continues to look strong.
We raise our FY19-20 net profit forecasts by up to 5.8% due to margin improvements.

Health Management International’s (HMI) FY18 headline PATMI increased 90.5% y-o-y to RM62.2m. The large one-off increase was mainly due to the completion of its consolidation exercise in 2Q17, with 100% of net income now attributable to shareholders. This came in 5.8% ahead of our full-year estimate.

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HMI’s revenue increased to RM467.6m (+7.3% y-o-y). FY18 revenue performance was attributed to the increase in outpatient load, growing from 399,100 in FY17 to 416,200 in FY18 (+4.3% y-o-y) from increased healthcare demand from the availability of government subsidies.
Billing intensity also improved commendably, with average inpatient and outpatient bill sizes growing by 5.6% and 9.0% respectively for FY18. Foreign patients continued to outpace the growth in local patient load. As a result, the foreign-to-local mix inched up towards 24:76 (4QFY17: 23:77).

HMI’s EBITDA margin also increased marginally to 24.6% for FY18 (+2.1ppt) supported by the ramp-up at Regency Hospital.
Moving forward, we expect margins to continue improving.

Construction on Regency Hospital extension is pending the necessary approvals and is expected to commence by the end of 2018. The hospital extension is targeted to be commissioned by FY21. Following which, the Regency Hospital will become a 380-bed tertiary hospital with capacity to expand to 500 beds.
Managing the hospital’s bed occupancy is key to driving growth, given the dip in FY18 where the group’s operational bed occupancy declined from 62% to 58% in 4QFY18, due to shorter length of stay from trends such as day surgeries. We expect occupancy rates to be affected with the new hospital upgrades, leveling to approximately 55-58% in FY19-21.

The group’s 62.5% acquisition of day-care-surgery and multi-disciplinary medical centre, StarMed Specialist Centre (SSC), has received the relevant Ministry of Health licences and has completed renovations. The new 16,000 sf one-stop ambulatory care centre, comprising specialist clinics, operating theatres, endoscopy suites and radiology facilities, is on track to officially begin operations in FY19.
StarMed Specialist Centre (SSC) will look to market its niche offering through local health talks and overseas representative offices to bring in international patients. Gestation start-up losses from operations will potentially take 2-3 years. We conservatively estimate approximately RM1.5m-2.0m in EBIT loss from its initial operations.

As of end-FY18, Health Management International had a net debt of RM137m. Total borrowings during the financial year increased by RM33m, mainly due to consolidation of the mortgage loans (c. 20-year tenure) taken up by StarMed, amounting to RM103m, and mainly offset by repayment of term loans during the year.
Health Management International intends to pay off its debt with excess cash and we expect leverage to be well contained. Gearing remained relatively stable, up from 0.52x in FY17 to 0.55x in FY18. The group also declared a final dividend of 2 sen (up from 1 sen in FY17), which represented 27.5% of FY18 core net profit.

We have raised our FY19-20 net profit forecasts slightly by up to 5.8% on the back of revenue improvements from higher billing intensity and patient load.
We have also incorporated slight margin improvements and have built in start-up EBIT loss for StarMed of approximately RM1.5m-2.0m.
We project a 3-year FY19-21 EPS CAGR of 7.1%

Our target price is based on the following factors:
1. explicit 2019-23F free cash flow forecasts;
2. terminal growth of 2.5% (in line with Malaysia’s 10-year long-term inflation rate); and
3. WACC of 7.0%.
We remain positive on HMI’s growth outlook, given the strong healthcare industry in Malaysia as well as the group’s long term expansion plans.

Lucas Teng UOB Kay Hian Research | Andrew Chow CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-08-29

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