Health Management International - Maybank Kim Eng 2019-05-13: Healthy Vital Signs


Health Management International - Healthy Vital Signs

Initiate at BUY – positive prognosis

  • Initiate HEALTH MANAGEMENT INTL LTD (HMI, SGX:588) with DCF-based Target Price of SGD0.68 (WACC: 7.1%, LTG: 1.5%). We believe HMI will continue to be a beneficiary of multiple structural factors, such as aging population demographic shift and rising affluence, potential patient growth from mega projects, as well as medical tourism.
  • HMI will also expand its Singapore exposure via the acquisition of StarMed, a medical centre focused on day surgeries. We believe that a re-acceleration of core EPS growth to 14-18% in FY20-21E from an 11% decline in FY19E (StarMed gestation costs) will rerate the shares to our DCF Target Price, which equates to a FY20E P/E of 27x (historical mean: 26x).

Corporate Information

Unique Malaysia hospital operator with a Singapore homecoming

  • Health Management International (HMI) was listed on SGX since 1998. It operates two renowned hospitals in Malaysia and an ambulatory centre, StarMed in Singapore. In Malaysia, the hospitals are Mahkota Medical Centre (MMC) in Malacca, and Regency Specialist Hospital (RSH) in Johor. Both hospitals have around 200 specialists across a comprehensive range of medical and surgical specialties and sub-specialties.
  • Contrasting other hospitals in Malaysia that operate under the employee model, HMI differentiates itself through its independent practice model. This model allows specialist hospitals to own and operate their clinics within HMI’s hospitals, similar to most private hospitals in Singapore. This has worked well in attracting and retaining top doctors, which is a crucial success factor in Malaysia’s hospital industry. According to management, this operating model has worked well for HMI. Doctor attrition is low, and departures are usually due to personal reasons (e.g. to practice in another state), rather than push-factors such as dissatisfaction with the hospital.
  • MMC’s position in medical tourism is entrenched in Malaysia, with strong reputation among Indonesian patients. Its multi-disciplinary offerings are among the most comprehensive south of Kuala Lumpur. MMC has the most complete cancer support services in Malacca, being the first and only hospital in the state to provide PET-CT scan services.
  • Meanwhile, RSH is a relatively young hospital, which started in 2009. It is close to the Pasir Gudang industrial area, and is the only private hospital in Malaysia with 24-hour accident and emergency department with emergency specialists. Most of its patients are local. We believe RSH’s prospects in Johor remain bright, as the state’s medical needs are underserved. The state has only a 1.6 bed per-1000-population ratio, below the national average of 1.9, and Singapore’s 2.1. Meanwhile, the doctor per population ratio is 1:769, contrasting the national average of 1:554.
  • Both MMC and RSH are fully owned as at Mar-17. Previously, HMI’s stakes in these hospitals were 49% and 61% respectively.
  • In 2018, HMI announced the acquisition of a 70% stake in StarMed, Singapore’s first private ambulatory care centre. The rationale for this acquisition was to capture the rising trend of day surgeries in Singapore. An overview of HMI’s assets is found in the attached PDF report.

Investment Thesis

Positive domestic drivers

  • We are constructive towards the prospects of both of HMI’s hospitals in Malaysia, namely Mahkota Medical Centre (MMC) in Malacca and Regency Specialist Hospital (RSH) in Johor. Both are beneficiaries of trends such as:
    1. rising affluence;
    2. aging population;
    3. rising insurance take-up rates; as well as
    4. a beneficiary of patient spill-over from an overburdened public healthcare system.
  • In addition, we believe RSH is also a beneficiary of local development initiatives. Today, 30% of RSH’s patients are corporate customers, due to its proximity to the Pasir Gudang industrial area. RSH is also the only private hospital in Malaysia to have a 24-hour A&E with emergency specialists. As such, we believe RSH could be well positioned to capture future patients upon the completion of the Petronas RAPID project, which is slated for completion in 2019 and is expected to create 54,000 jobs. Presently, MMC/RSH receives around 300,000 and 150,000 patients p.a.
  • Further, Johor’s healthcare needs are under-served, and this boosts RSH’s prospects too, in our view. The state has only a 1.6 bed per-1000- population ratio, below the national average of 1.9, and Singapore’s 2.1. Meanwhile, the doctor per population ratio is 1:769, contrasting the national average of 1:554.

… tailwinds from medical tourism

  • Foreign patients account for 20% of the total at HMI. A large majority of this comprise Indonesian patients who seek treatment at MMC. MMC has a strong reputation in Indonesia, and is one of the market leaders in medical tourism in Malaysia, with an 8-10% market share, based on our estimate. MMC was the first to pioneer medical tourism in Malaysia in 1999.
  • We understand that much of MMC’s reputation in Indonesia has been built via word-of-mouth from patients recommending to friends and family. In addition, marketing efforts are also boosted by a network of 14 representative offices across the Indonesian archipelago.
  • We believe tailwinds supporting HMI’s medical tourism prospects include:
    1. favourable relative cost compared to Singapore; and
    2. government policies to encourage medical tourism.
  • According to HMI, bill sizes at MMC and RSH are around a-third compared to that in Singapore. Meanwhile, the government has designated Penang, Malacca and Johor as medical tourism hubs. South of KL, MMC is among the top hospitals that provide the most comprehensive services.

A Singapore homecoming

  • In the past year, HMI has further diversified its exposure into Singapore from Malaysia. These have been through the acquisition of: a
    1. 70%-stake in StarMed, a new day-surgery and multi-disciplinary medical centre that offers quality clinical services at competitive prices, as well as;
    2. a 28% stake in Plus Medical, which owns a network of 16 primary care clinics across Singapore. The initial focus of StarMed will be towards cardiovascular, digestive, minimally invasive surgeries and diagnostic services.
  • The rationale behind the acquisition of StarMed was because HMI is optimistic towards the growth trajectory of day surgeries, due to:
    1. patient preferences for same-day discharge: and
    2. preference by the Singapore Ministry of Health and restructured hospitals to reduce bed crunch.
  • According to the Singapore Department of Statistics and BMI, day surgeries have enjoyed a 2000-16 CAGR of 7.6%, outpacing the growth of inpatient surgeries at 2.1% CAGR over the same timeframe. Meanwhile, Plus Medical is in its initial stages of growth. HMI intends to leverage Plus Medical’s growing network in Singapore to feed patients to StarMed.

Financial analysis

Pause in earnings growth from StarMed gestation costs

  • We forecast revenue growth of 7-9% in FY19-21E, largely driven by HMI’s two hospitals in Malaysia, on the back of growth in patient volumes and improving revenue intensity. We have factored in management’s expectation that StarMed will reach break-even on a net profit basis in three years. Based on StarMed’s loss run-rate in 2Q19, we estimate the total start-up loss could amount to MYR20m in FY19E.
  • We have not factored in a revenue contribution, due to the lack of operational clarity. As a result of star-up losses at StarMed, we expect HMI’s core EPS to fall 10% y-o-y in FY19E, before rebounding by 14% y-o-y in FY20E.

Balance sheet and cash flow

  • HMI’s balance sheet is sound, with net gearing of 55% as at FYJun18. Over the longer term, we expect HMI to revert to net cash, due to the strong cash generating ability of the business.
  • We have factored in capex of MYR190 in FY19-20E, of which MYR150m is earmarked for the new expansion block at RSH. The expansion block is expected to break ground in 4QFY19E, and commissioned in 2021.


Initiate BUY with SGD0.68 TP

  • We value HMI on DCF basis, with explicit forecasts to FY29E. Our terminal value is based on a 1.5% long-term growth rate. As we expect HMI to be net-cash in the long run, our WACC is equal to COE of 7.1%. Our COE is based on 0.7x beta, based on three-year history against the FSSTI. Our Target Price implies FY19-21E P/E of 33x/27x/23x.
  • HMI is currently trading at 25x FY19E P/E, slightly below its 2-year mean of 27x. The stock began to de-rate in Aug-18 from 27x forward P/E (1SD above 2-year mean).
  • We believe the de-rating could relate to market uncertainty regarding start-up costs and the sustainable level of profitability at StarMed. We look for core earnings growth to accelerate to 14%/18% each in FY20-21E following a 10% decline in FY19E, which could lead to a valuation rerating towards the mean.

Peer comparison

  • We believe the closest comparables for HMI are KPJ (Hold, Target Price MYR1.08) and IHH HEALTHCARE BERHAD (SGX:Q0F) (Buy, Target Price MYR6.90). Between the two, we believe KPJ is a more relevant comp, as like HMI, KPJ’s revenue is more concentrated in Malaysia (HMI: 96% KPJ: 97%, IHH: 20%).
  • Further, due to IHH’s strong growth and growing international presence, the market may be ascribing a valuation premium for IHH over other healthcare stocks in the region. This may be because the scale of IHH’s international footprint may not be easily replicable.

Lai Gene Lih CFA Maybank Kim Eng Research | 2019-05-13
SGX Stock Analyst Report BUY INITIATE BUY 0.68 SAME 0.800