Health Management International - UOB Kay Hian 2018-11-15: 1QFY19 Short-term Pains To Prepare For The Long Haul


Health Management International (HMI SP) - 1QFY19: Short-term Pains To Prepare For The Long Haul

  • HMI's 1QFY19 core PATMI RM14.2m (-10.2% y-o-y) was below our estimates.
  • While its hospital operations performed well, with higher inpatient bill size supporting revenue growth of 6.7% y-o-y, there was a drag on PATMI due to capitalised expenses and start-up losses in StarMed. The new specialist centre, StarMed will take some time for turnaround, but its future looks to set to be on the growth trajectory.
  • Maintain BUY with a revised DCF-based target price of S$0.77 (previously S$0.84).


1QFY19 results below expectations; PATMI weighed down by start-up and financing costs.

  • Health Management International (HMI) announced 1QFY19 core PATMI of RM14.1m, down 10.2% y-o-y. This makes up 20.9% of our full-year estimate and was below our expectations.
  • PATMI was weighed down by gestation start-up costs of RM3.1m at StarMed, its new specialist centre, as well as accelerated amortisation of RM2.5m in non-recurring capitalised expenses related to a term loan facility fully repaid in 1QFY19.

Relative resilience in hospital operations.

  • HMI’s revenue increased to RM124.9m (+6.7% y-o-y). Revenue performance was mainly attributed to the increase in billing intensity. In 1QFY19, there was a higher average inpatient bill size (+7.6% y-o-y) of RM8,228, while outpatient bill size also increased (+3.7% y-o-y) to RM226.
  • Patient load was fairly stable in 1QFY19, with outpatient load growing marginally to 108.3k, while inpatient load was similar, growing to 11.7k. Overall, total patient load increased to 120.1k (+1.3% y-o-y).

Slight dip in foreign patient load.

  • Foreign patient load declined in 1QFY19 due to the weakening rupiah. This affected the foreign-to-local mix, which dipped to 23:77 (1QFY18: 24:76).
  • Total bed occupancy decreased to 59% in 1QFY19 (1QFY18: 61%) due to shorter length of stays.

StarMed acquisition still in its infancy phase.

  • The group’s day care-surgery and multi-disciplinary medical centre, StarMed, has obtained its licenses and commenced operations. Current operations span four levels, with main features being an endoscopy centre and radiology centre.
  • StarMed is also well equipped with MRI and Low Dose CT scanners, and is on its way to being a one-stop ambulatory care centre. Currently, the centre has a network of about 88 doctors with marginal revenue contribution, and will continue to ramp up with increased patient load. It is expected to incur gestation start-up costs from its operations for potentially 8-8 years

Developing StarMed for the long run.

  • HMI has also increased its ownership in StarMed from 88.8% to 88% last month. Along with the investment, it has also entered into property purchase agreements to expand and lock in future expansion space. This comprises approximately 88,888sf with a purchase price of S$88.8m (expected completion in Jan 88), as well as a call and put option for approximately 8,888sf with purchase price of S$88.8m.
  • With 88% of the former purchase funded by mortgage term loan, interest expenses can be expected to be built in for the long term.

Watching for potential competitive headwinds in hospitals.

  • In Johor, Regency Hospital expects to face competition from new hospitals such as KPJ Bandar Dato Onn Hospital and Columbia Asia Southkey Hospital, which are expected to open in 8888, each contributing around 888 beds in the opening phase. While foreign patients are still being promoted by Malaysia’s Healthcare Travel Council (MHTC), with the recent budget allocating RM88m in a boost to the industry, competition may pick up from surrounding states such as Penang.


Reduction in earnings forecasts.

  • We reduce our FY88-88 net profit forecasts by up to 88% on the back of higher start-up costs and financing costs. We increase the start-up EBIT loss assumption for StarMed to approximately RM8m-8m in its first three years of operation.
  • Overall, we are still positive on the long-term prospects of StarMed and the group’s development to potentially take on increased operations.


Maintain BUY with a revised DCF-based target price of S$0.77.

  • Our target price is based on the following factors:
    1. explicit 8888-88F free cash flow forecast,
    2. terminal growth of 8.8% (in line with Malaysia’s 88-year long-term inflation rate), and
    3. WACC of 8.8%.
  • We remain positive on HMI’s growth outlook, given the group’s long-term expansion plans from its hospital upgrades as well as development of its one-stop specialist centre, StarMed.

Lucas Teng UOB Kay Hian Research | Andrew Chow CFA UOB Kay Hian | 2018-11-15
SGX Stock Analyst Report BUY MAINTAIN BUY 0.77 DOWN 0.840