IHH Healthcare - Maybank Kim Eng 2018-11-28: Look Beyond The Noises


IHH Healthcare - Look Beyond The Noises

Strong core earnings; Maintain BUY

  • Strong 3Q18 core net profit overshot street’s expectation, led by growth in all key markets.
  • Maintain our FY18F EPS but reduce FY19-20F EPS by 15-22% as we incorporate for the soon-to-complete acquisitions. Consequently, our SOP-based Target Price is reduced to MYR6.45 (-8%).
  • The stock has already priced-in the negatives given the correction in share price (- 22% in 6 months) and is trading at 12M fwd PER of 43x (mean: 46x).

Within our expectation but overshot street’s

  • 3Q18 core net profit of MYR309m (+21% q-o-q, +146% y-o-y) brought 9M18 core net profit to MYR686m (+66% y-o-y), making up 76% and 94% of our and street’s full-year forecasts.
  • The sharp y-o-y growth in 3Q18 earnings was driven by its key markets (Singapore, Malaysia and Turkey) with higher average revenue per inpatient and stable-to-higher inpatient volume.

Strong deliveries at key markets

  • On a q-o-q basis, Singapore and Malaysia posted commendable EBITDA growth of 6% and 17% respectively. Meanwhile, Acibadem (Turkey) registered the strongest EBITDA growth (3Q18: +29% q-o-q) given the higher number of private insurance/foreign patients and more complex cases handled.
  • However, overall earnings were partially dragged by the weaker North Asia earnings as GHK registered wider EBITDA loss of MYR55m (2Q18: -MYR49m) due to higher cost (added more new services).

Incorporating for Acibadem and Fortis Healthcare

  • We maintain our FY18F EPS but lower our FY19-20F EPS by 15%/22% to reflect the 2 ongoing corporate exercises (to complete by end-Dec 2018):
    1. Acibadem - Acquisition of additional 30% equity stake in Acibadem via issuance of 524m new IHH shares (+6% to existing share base),
    2. Fortis Healthcare – IHH has already completed the acquisition of 31% equity interest in Fortis Healthcare in Nov 2018 and a mandatory open offer (up to 26% of equity capital) would be undertaken by end-Dec 2018. We have assumed for Fortis Healthcare to remain loss-making in FY19-20F (1HFY3/19: MYR140m core net loss).

Updates on IHH’s 2 key acquisitions

Acibadem - Acquisition of additional 30% equity interest

  • In Oct 2018, IHH announced that it would be acquiring an additional 30% equity interest in Acibadem via issuance of 524m new IHH shares (+6% to its existing share base). All the necessary approvals (including from Bank Negara Malaysia) have been obtained and IHH expects to complete the deal within the next 1-2 weeks. This would bring IHH’s total equity interest in Acibadem to 90% (from 60%).
  • In 9M18, we estimate that Acibadem recorded a core PATMI of MYR76m (11% of Group’s total core PATMI in 9M18). We expect this unit to post stronger earnings ahead on the healthy growth at its existing hospitals as well as higher contribution from Acibadem Altunizade (opened in Mar 2017) and Acibadem Maslak (added more beds recently). Additionally, IHH plans to repay Acibadem’s USD/EUR-denominated loan (totalling USD250m) and dispose non-core assets to reduce the forex volatility to the Group.
  • In our earnings model and SOP valuation, we have assumed for higher earnings contribution from Acibadem and also assumed for higher share base of 8.8b for IHH from FY19F (+6% y-o-y).

Fortis Healthcare - Acquisition of up to 57% equity interest

  • In Nov 2018, IHH completed the subscription of 31% new shares in Fortis Healthcare via a cash consideration of INR40b (or MYR2.3b). Subsequently, a mandatory open offer (up to 26% of the enlarged equity capital and up to MYR2b cash consideration for IHH) would be undertaken by end-Dec 2018. We think the open offer would be fully taken-up given the attractive offer price of INR170/shr (22% upside from current share price).
  • Thereafter, IHH also plans to privatise Religare Health Trust (SGX:RF1U, RHT) by 1Q19. RHT is presently 28%-owned by Fortis Healthcare and owns most of the hospitals which Fortis Healthcare operates at. Hence, by privatising RHT, Fortis Healthcare could save on property rental cost.
  • Additionally, IHH believes it can extract synergies and turnaround the business in the medium-to-long term via improved procurement process and restructuring Fortis Healthcare’s debt.


  • In our earnings model and SOP valuation, we have assumed for:
    1. IHH to own a 57% equity stake from FY19F;
    2. Fortis Healthcare to remain loss-making in FY19-20F (1HFY3/19: MYR140m core net loss) and only turnaround from FY21F onwards.
  • Post-the abovementioned exercises (Acibadem, Fortis Healthcare, RHT), management expects the Group’s net gearing to raise to 40% (from 4% as at end-Sep 2018).
  • We have yet to include RHT into our earnings model and SOP valuation.

Risk statement

  • There are several risk factors for our earnings estimates, price target, and rating for IHH. Abrupt changes in the economy and insurance policies may lead to lower earnings for IHH.
  • Additionally, sharp appreciation of MYR against SGD/TRY/ INR/HKD/CNY will also affect its earnings, for a bulk of the Group’s earnings is derived from overseas markets.

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2018-11-28
SGX Stock Analyst Report BUY MAINTAIN BUY 6.45 DOWN 7.000