IHH Healthcare - UOB Kay Hian 2018-11-28: 9M18 Earnings Boosted By Increasingly Mature Greenfield Hospitals


IHH Healthcare - 9M18: Earnings Boosted By Increasingly Mature Greenfield Hospitals

  • 9M18 adjusted core earnings grew 66% y-o-y, above expectations.
  • Despite 3Q being the seasonal low for IHH, organic growth across its core markets, led by Turkey coupled with maturing new hospitals such as GHK and Acibadem Altunizade boosted earnings.
  • Completion of the Fortis exercise and the subsequent turnaround throughout 2019 could catalyse IHH further.
  • Upgrade to BUY with a SOTP-based target price of S$1.95.


9M18 adjusted core earnings above expectation.

  • IHH Healthcare’s (IHH) 9M18 headline earnings contracted 86% y-o-y to RM119m, primarily due to a RM1.1b loss arising from translation losses of Acibadem’s non-Turkish lira-denominated borrowings and payables. Stripping out the exceptional, 9M18 core profit surged 66% to RM686m, which is above consensus expectations at 90% of earnings estimates.
  • For the quarter, had it not been for the stronger ringgit, revenue and EBITDA would have grown impressively at 18% and 17% y-o-y in constant currency terms, respectively. This report marks a transfer of coverage to a new analyst.


Core markets register healthy revenue intensity as India sees an unusual dip.

  • In Singapore, inpatient volume was flattish amid high revenue intensity of 8.0% y-o-y in 3Q18.
  • Meanwhile, Malaysia enjoyed 3.3% y-o-y inpatient volume growth against 2.6% y-o-y revenue intensity.
  • Acibadem’s performance was impressive given Turkey’s currency turmoil, with admission growing 7.5% y-o-y on the back of a steep revenue per inpatient increment of 31.5% y-o-y. It was partially boosted by foreign patient inflow, attracted to more affordable medical treatment. Foreign proportion of Acibadem’s revenue has now increased to 22% from 14% previously.
  • Lastly, India’s inpatient volume fell 20.7% y-o-y, which is an anomaly attributed to a team of doctors that collectively left the system. It has since been addressed with the hiring of new anchor doctors.

Earnings benefitting from economies of scale.

  • Operational earnings for the quarter saw marked improvement across the core markets y-o-y, albeit masked by the strengthening ringgit. In particular, Acibadem increased its 3Q18 revenue by 38% y-o-y and EBITDA by 66% y-o-y in constant currency terms.
  • Coming off a high operating leverage, increasingly gestated Acibadem’s Altunizade Hospital (launched in Mar 17) and higher revenue intensity attributed to more complex cases, higher foreign patient intake and private insurance-driven price increase disproportionately impacted operational earnings,

GHK fast approaching EBITDA breakeven.

  • Since 500-bed Gleneagles HK (GHK) was launched in Mar 17, it has progressively narrowed 9M18 operating losses to -RM138.7m, lower 37% y-o-y (9M17: RM218.7m). To accelerate growth, management aims to capture medical tourists from mainland China to further alleviate current occupancy rate of ~50%. We expect GHK to achieve EBITDA breakeven in 2H19.

Chengdu Hospital due in 2019.

  • In contrast to GHK’s launch of all its operational beds in its entirety, ChengDu Hospital will be progressively launched as it operates under kinder restriction. Hence, it will avoid a drag on earnings, as previously seen with GHK.

Fortis on the horizon.

  • On 13 Nov 18, IHH completed the subscription of 31.1% of Fortis’ total voting equity. Subsequently, it will complete its open offer of up to 26% of Fortis’ by 4Q18. Pursuant to that, it will embark on the turnaround of the third largest hospital group by market capitalisation in India.
  • We expect the acquisition to be value accretive to existing IHH shareholders, with price ranging from our existing IHH valuation of S$1.95 to S$2.11, depending on the acceptance level of Fortis’ open offer. Post exercise, IHH’s net debt-to-equity remains manageable at 0.4x.


  • We furnish our forecast with housekeeping adjustments, while introducing 2020 forecast.
  • Key risks:
    1. execution risk,
    2. shortfall in turning around Fortis,
    3. heightened regulatory hurdles, and
    4. intensified competition.


Upgrade to BUY with a SOTP-based target price of S$1.95 (previously S$1.85)

  • Our SOTP-based target price implies 36x 2019F PE, well below its historical 3-year 12-month forward PE of 42x.
  • IHH’s sound track record is beginning to pay off through increasingly mature but relatively new greenfield hospitals (GHK and Altunizade Hospital).
  • Additionally, Fortis completes IHH’s portfolio of presence in highly populous emerging markets with highly visible pipeline of growth stretching for years.

Singapore Research Team UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-11-28
SGX Stock Analyst Report BUY UPGRADE HOLD 1.95 UP 1.710