Health Management International - Phillip Securities 2018-11-15: Biting A Near-Term Bullet


Health Management International - Biting A Near-Term Bullet

  • HMI's 1Q19 Revenue and Core PATMI missed our estimates by -6.9% and -19.9% respectively. This miss is due to StarMed start-up costs and accelerated amortisation of finance costs related to the consolidation exercise.
  • Higher outpatient load and average bill sizes boosted revenue by 6.7% y-o-y.
  • EBITDA rose 8.6% y-o-y due to higher revenue intensity and effective cost management.
  • Maintain BUY with a lower DCF-derived Target Price of S$0.77. Given a more moderated growth, we lowered our revenue and EBITDA estimates for 2019-2020 by 5% and 7% respectively.

The Positives

Both hospitals enjoyed higher patient load and larger average bill sizes.

  • Mahkota (Mahkota Medical Centre) and Regency (Regency Specialist Hospital) saw a 1.3% y-o-y growth in total patient load to 120.1k in 1Q19.
  • Local patient load grew slightly faster than foreign patient load and accounted for 77% of the Group’s patients as compared to 76% a year ago. Foreign patient load decreased due to the weakening Rupiah.
  • Outpatient volume was the primary revenue driver, growing 1.3% y-o-y, while inpatient load remained relatively flat because of competition from heavily subsidised Malaysian public healthcare as well as a trend towards shorter lengths of stay.
  • Average bill size continued to grow with higher revenue intensity and increasingly complex surgeries. Average inpatient and outpatient bill size rose 7.6% and 3.7% y-o-y respectively.

 Day Surgery cases continue to lift margins.

  • Day Surgery is gaining traction as we continue to see bed occupancy rate trending downwards (59% in 1Q19, vs 61% in 1Q18), as patients enter into a shorter length of stay and higher average outpatient bill size. Note that the bed occupancy rate tracks overnight-stays and Day Surgery cases are billed under the outpatient category. The total number of operational beds remained stagnant at 437.
  • HMI is still increasing their bed capacity because the beds are fully occupied at mid-day even though overnight occupancy rate is slowing.

 EBITDA margins improved

  • EBITDA margins improved 50 bps to 24.9%, due to higher revenue intensity (increasing complexity of surgeries) and effective cost management measures.

The Negative

PATMI fell for the first time in two years (-22.8% y-o-y)

  • PATMI fell for the first time in two years (-22.8% y-o-y), due to FOREX loss of RM3.5mn (due to a weaker Malaysian ringgit), StarMed’s gestation start-up costs of RM3.1mn (majority belongs to StarMed’s 20 year tenure mortgage) and accelerated amortisation of RM2.5mn of capitalised expense.
  • Excluding FOREX loss (RM3.5mn) and StarMed’s start-up costs (RM3.1mn), adjusted PATMI rose 8.7% y-o-y.

 Finance costs jumped 173.9% or RM3.6mn y-o-y.

  • Amortisation of RM2.5mn of capitalised expense was recognised in relation to the term loan facility drawn down for the consolidation of ownership of Mahkota and Regency to 100% each. The remaining RM1.1mn was due to mortgage financing costs incurred by StarMed.
  • Total debt spiked 66.9% y-o-y to RM241.4mn as at 30 Sep-18. Majority of the debt at from StarMed related to property mortgage at c.20 years tenure. However, net gearing remained stable at 0.56x as compared to 0.55x last quarter. We believe that HMI’s higher leverage will be well contained by healthy operating cash flows to meet its debt obligation.


  • We remain positive on the outlook for HMI. The upgrading and expansion plans in Mahkota and Regency is expected to be on track to meet the growing demand.

Mahkota (Melaka)

  •  Expansion of clinical space for diagnostic radiology and other departments are expected to complete by early 2019. In addition, there will be progressive upgrading and refurbishing of older wards over the next two years.

Regency (Johor)

  • The expansion plan is on track. Tender for the new extension block and land preparations have commenced. The expansion will more than double its existing capacity with additional inpatient beds (mid-term target 380 beds, and eventually 500 beds), clinical services, operating theatres and clinical suites. The extension is slated to commission in 2021.
  • Both hospitals continue to develop their Centres of Excellence and recruit skilled sub-specialists to broaden their service offerings, especially in quality and safety. With the upcoming opening of two competitors, KPJ Bandar Dato’ Onn Specialist Hospital and Columbia Asia South Key, we believe that HMI would be able to remain competitive as the two new hospitals find their footing.

StarMed Specialist Centre (StarMed)

  • StarMed obtained its licenses and commenced operations in 1Q19. HMI increased its ownership of StarMed to 70% in October 2018 (previously 62.5%). The remaining 30% is owned by doctors. It currently owns the fifth to the seventh floor and rents the eight floor. HMI has entered into agreements to purchase additional units (first, eight and ninth floors) with an aggregate area of 10,602 sqft.
  • StarMed is expected to incur gestation start-up losses from its operations. This will drag down margins for 2-3 years before it breaks even. The estimated staff strength when fully operational is 40-50 staff. More than half have been hired at this point.
  • StarMed has completed renovations and received licenses from the Ministry of Health’s to operate. Key growth drivers for StarMed will be higher insurance-holding population, ageing population and medical tourism. We factored in RM1.6-2.2mn in EBIT loss p.a. for each of the first three years of operations.

Maintain BUY with a lower DCF-derived Target Price of S$0.77.

  • Given a more modest growth rate, we lowered our revenue and EBITDA estimates for 2019-2020 by 5% and 7% respectively, resulting in a lower DCF-derived Target Price of S$0.77.
  • We maintain our view that HMI will benefit from the socioeconomic tailwinds arising from
    1. public and private initiatives to improve infrastructure and regional connectivity;
    2. increasing domestic insurance take-up rate;
    3. favourable demographics; and
    4. cost competitive pricing compared to regional peers.

Tin Min Ying Phillip Securities Research | https://www.stocksbnb.com/ 2018-11-15
SGX Stock Analyst Report BUY MAINTAIN BUY 0.77 DOWN 0.830