IHH Healthcare - Maybank Kim Eng 2019-05-31: Shortfall On Exceptionally High Taxes

IHH HEALTHCARE BERHAD (SGX:Q0F)

IHH Healthcare - Shortfall On Exceptionally High Taxes

IHH HEALTHCARE BERHAD (SGX:Q0F)'s 1Q19 results were below our/market expectations due to higher-than-expected taxes. But core net profit growth was still intact, driven by margin expansion across all key markets.
We trim FY19F EPS by 9% as we raise tax rate assumption to 37% (from 29%); FY20-21F are unchanged. Consequently, our SOP-based Target Price is trimmed to MYR6.80 (-1%).
Maintain BUY for its long-term growth prospects in new markets (China, India). Stock trades at 12M fwd PER of 43x (mean: 46x).

Excluding the one-offs (total negative: MYR99m), IHH's 1Q19 core net profit of MYR188m (+56% y-o-y, -45% q-o-q) was 17%/18% of our and street’s full-year estimates. The adoption of MFRS 16 led to a total negative impact of MYR12m (or 6% of 1Q19 core net profit), as the higher depreciation outweighed the lower operating lease expense.

On a y-o-y basis, IHH's 1Q19 revenue and EBITDA jumped 40%/31%, based on constant currency and also excluding the MFRS 16 impact.
All key units (Singapore, Malaysia, Turkey, Fortis, GHK) registered stronger EBITDA on margin expansion (refer results table in attached PDF report). q-o-q, however, core net profit was weaker given the higher tax expense of MYR196m (+92% q-o-q), which implied tax rate of 93% (+80.5-ppt q-o-q). This was largely due to the tax on cash dividend received from RHT HEALTH TRUST (SGX:RF1U) (28%-owned by Fortis), following the disposal of assets to Fortis in Jan 2019 (a restructuring exercise and hence, non-recurring).

We expect better earnings ahead, underpinned by organic growth in key markets and turnaround at Fortis/GHK. Also, forex-led earnings volatility would be less with the non-Lira debt reduced to USD420m equivalent in Apr 2019 (from USD670m).
As for the Open Offer for Fortis (raising IHH’s stake in Fortis to 57% from 31% now), management expects the India’s Supreme Court to lift the stay by 3Q19 as all the hearings are completed.
See attached PDF report for IHH's SOP valuation details.

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-05-31

SGX Stock Analyst Report BUY MAINTAIN BUY 6.80 DOWN 6.900