IHH Healthcare - DBS Research 2019-09-02: Strong Operating Performance

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IHH HEALTHCARE BERHAD (SGX:Q0F)

IHH Healthcare - Strong Operating Performance

• IHH's 1H19 core net profit up 4% y-o-y; revenue and EBITDA rose 38% and 30% y-o-y on constant currency basis.
• Successfully reduced non-TRY debt by close to two-thirds.
• Gleneagles HK opening new beds.
• Maintain BUY; Target Price lifted to RM6.40.

Strong operating performance

• Maintain BUY, raised Target Price to RM6.40. We maintain our BUY rating on IHH HEALTHCARE BERHAD (SGX:Q0F) and raised our Target Price to RM6.40.
• We remain positive on IHH’s growth plans, with a pipeline of new hospitals in China and potential escalation in expansion momentum in India despite near-term headwinds and gestation period. Trading below 1 standard deviation of its historical average, we believe potential headwinds are priced in.

Where we differ.

Gleneagles Hong Kong leads IHH’s ‘Growth 2.0’ with upcoming platforms in China and India.

• Despite taking longer-than-expected for Gleneagles HK to reach EBITDA breakeven, we believe Gleneagles HK will lead IHH into its next growth phase, a view the market may not be convinced of just yet.
• In addition, the acquisition of Fortis Healthcare is EBITDA accretive and we continue to expect that management realises further cost synergies from the acquisition.

Potential Catalysts:

Shorter gestation period for new hospitals, organic growth and new brownfield or greenfield hospitals.

• IHH's 1H19 recorded both organic and inorganic earnings growth. 1H19 headline net profit grew 23% y-o-y to RM275m, largely led by lower forex translation losses, offset by higher interest costs. Core profit was up 14% y-o-y.
• Key result highlights:
  1. non-TRY debt reduced to US$255m,
  2. Gleneagles HK opening new beds,
  3. Singapore and Malaysia saw growth in foreign patients.

WHAT’S NEW - Strong operating performance

1H19 core net profit (excl TRY forex translation losses) up 14% y-o-y from better operational performance and maiden contribution from Fortis.

• IHH's 1H19 headline net profit grew 23% y-o-y to RM275m. The higher net profit was largely due to lower forex translation losses, offset by higher interest cost (estimated to have more than doubled) from higher borrowings to acquire Fortis Healthcare. Excluding exceptional items, core profit grew 14% y-o-y to RM429m, which was mainly due to
  1. better core operations performance from all key markets (EBITDA +40% y-o-y),
  2. contributions from newly acquired hospitals including Amanjaya and Fortis Healthcare (EBITDA RM171m in total, x.11% of group EBITDA),
  3. lower forex losses of RM1.9m in 1H19 vs RM26.8m in 1H18, and
  4. one-off items including the reversal of RM21.8m accrued interest on prior years’ tax payable and RM28.5m of trustee management fee income from disposal of RHT Health Trust (SGX:RF1U) asset; offset by higher interest expense. We estimate that core net profit (ex-forex) rose 7% y-o-y, below consensus’ estimates.
• 2Q19 headline net profit grew 12% y-o-y to RM185m mainly from lower forex translation losses offset by higher interest expense. Core profit fell 6% y-o-y on higher financing costs and lower forex exchange gain in 2Q19 of RM11m vs RM77m in 2Q18.

1H19 revenue and EBITDA on constant currency basis grew 38% y-o-y and 30% y-o-y respectively.

• IHH's 1H19 revenue grew 32% y-o-y to RM7.3bn with growth from maiden contribution from Fortis. Excluding Fortis, revenue was up 8% y-o-y from all key markets; Singapore (+11% y-o-y), Malaysia (+15% y-o-y) and North Asia (+26% y-o-y largely from Gleneagles HK) and Turkey (+3% y-o-y). On constant currency basis, 1H19 revenue increased 38% y-o-y with growth from all markets except India (ex-Fortis; -12% y-o-y).
• 1H19 EBITDA grew 40% y-o-y to RM1.6bn, in line with consensus, mainly from good underlying operational performance, contributions from Fortis and partial impact from MFRS16 adjustments. The EBITDA growth was largely from Malaysia (+25% y-o-y), Singapore (+13%), Acibadem (+42%) and lower losses from Gleneagles HK (-24%). On constant currency basis and ex-MFRS16, EBITDA increased 30% y-o-y.
• 2Q19 revenue and EBITDA grew 37% y-o-y and 47% y-o-y respectively and on constant currency (ex-MFRS 16) revenue and EBITDA increased 38% y-o-y and 31% y-o-y respectively.

EBITDA margins contracted q-o-q from all key markets.

• EBITDA margins (ex-ParkwayLife REIT (SGX:C2PU)) fell marginally q-o-q to 19.5% from 20.6% in 1Q19. Similarly, EBITDA margins (ex-new hospitals; ex-ParkwayLife REIT) contracted q-o-q to 23.0% from 24.7% in 1Q19. EBITDA margin contracted in all 3 key markets.

Gleneagles HK’s EBITDA losses stable q-o-q; occupancy above 60% and plans to open additional 30 beds.

• Gleneagles HK EBITDA losses was fairly stable q-o-q at RM34.5m in 2Q19 vs RM33.3m in 1Q19 (RM42.7m in 2Q18) as it continues to ramp up progressively. Occupancy remains above 60% on 150 operational beds (62% in 2Q19 and 68% in 1Q19) and average revenue per inpatient admission (APRIA) was c.HKD30k.
• Given the recent protests in HK, management noted that patients from China have fallen albeit by a small percentage while local patients remained stable. With occupancy above 60%, management looks to potentially open additional 30 beds this year and potentially to hire more staff (especially nurses).

Acibadem – strong performance led by price adjustments and foreign patients; reduced non-TRY debt to US$255m from US$670m

• On constant currency basis, Acibadem’s 2Q19 and 1H19 revenue grew 22% y-o-y and 23% y-o-y respectively while EBITDA grew 82% y-o-y and 72% respectively. The strong growth was partially led by strong growth in APRIA of 30% y-o-y in 2Q19 despite inpatient volumes falling 5% (mainly due to lower local patients at non-Istanbul hospitals). The good results was led by price adjustments of c.29% and higher foreign patients.
• In Apr19, Acibadem repaid US$250m out of US$670m equivalent of non-Turkish Lira debt and has successfully refinanced US$170m equivalent of non-TRY debt into TRY debt with 50% hedged. Post the restructuring / refinancing, management has successfully reduced its non-TRY debt to US$255m as at Jun19, ahead of its target in FY2020. This will substantially reduce its exposure to forex translation volatility. Management expects to reduce non-TRY debt further.

Singapore – strong performance driven by foreign patients’ growth and weaker MYR.

• In 2Q19 and 1H19, revenue from Singapore operations grew 12% y-o-y and 11% y-o-y respectively. Both APRIA and inpatient volumes continue to grow moderately at 3.6% y-o-y and 3.3% y-o-y in 2Q19 respectively, partially boosted by the weaker MYR. On constant currency basis, EBITDA was flat y-o-y as EBITDA margins deteriorated by 2ppts. y-o-y.
• Management alluded the strong performance to growth in foreign patients, thus, increasing foreign patients’ contributions to 26% in 2Q19 vs 23% in FY18. The increase in foreign patients were mainly from Indonesia, Middle East and Bangladesh.

Malaysia – strong performance led by Indonesian and Chinese patients.

• 2Q19 and 1H19 revenue from Malaysia operations grew 17% and 15% y-o-y led by higher inpatient volumes (+8.8% y-o-y) and ARPIA (+6.4% y-o-y), led by 16% y-o-y increase foreign patients largely from Indonesia (especially at its Penang hospital) and China. EBITDA margins improved 2.3ppts y-o-y in 2Q19.

India – consolidation of Fortis Healthcare remains EBITDA accretive; existing India hospitals weaken further.

• 2Q19 and 1H19 revenue came in higher at RM812m and RM1.6b vs RM160m and RM333m in 2Q18 and 1H18 respectively, led by maiden contributions from Fortis.
• Similarly, EBITDA was accretive. India (ex-Fortis) EBITDA losses further deepened with losses almost doubling q-o-q and y-o-y, following the departure of a renowned liver transplant surgeon in FY18 and management is in the midst of changing its strategy to a more multi-disciplinary focused hospital to reduce concentration risks on a single doctor. While this may take time, management believes the operations will turnaround as new doctors have been hired to replace doctors who have left.
• In Fortis Healthcare’s results briefing, management expects to derive some 100 crores (~RM60m; c.19% of Fortis’ annualised 1H19 EBITDA) of cost savings in the next 2 to 3 quarters, ahead of previous guidance of 85-90 crores in cost savings over the next 18 to 24 months from lower manpower costs, improvement initiatives in IT service & Infrastructure, supply chain and procurement. If successful, we expect contribution from Fortis Healthcare to grow at a faster pace in the medium-term.

Outlook

Management plans to reduce further Acibadem’s non-TRY debt to reduce its exposure to forex volatility.

• Now that management has successfully reduced non-TRY debt to below US$300m ahead of schedule, it plans to further reduce the debt and its exposure to forex volatility by paring down some of the debt from internal cash.

Gleneagles Chengdu to open in 4Q19; Gleneagles Shanghai to open in 2H20.

• Gleneagles Chengdu is expected to open by 4Q19 with 80 to 100 beds for a start. Gleneagles Shanghai is expected to open by 2H20. The hiring process for Gleneagles Chengdu has started.

Maintain BUY, raised Target Price to RM6.40.

• We maintain our BUY rating and raised our target price of RM6.40 to include the acquisition of Fortis but trimmed estimated contribution from Gleneagles HK.
• We reduced FY19F earnings by 15% to factor in 1H19 forex translation losses, and higher interest costs, partially offset by contributions from Fortis. We raised FY20F earnings by 29% to include the acquisition of Fortis.
• IHH currently trades at 18x FY19F EV/EBITDA, below 1 standard deviation of its historical average. We remain positive on IHH’s long-term growth plans, with a pipeline of new hospitals in China and a potential escalation of expansion into India. We believe the ramp-up in Gleneagles HK and better economic prospects in home countries such as Malaysia and Singapore could offset some of the start-up losses in China and lead IHH onto its next phase of growth.
• IHH’s medium-term outlook is bright while it rides out its near-term headwinds and gestation period for the new hospitals. In addition, with a potential strong platform in India and another in China, IHH now has exposure to the two largest economies in Asia with the highest growth potential in the healthcare
• sector. We believe this further elevates IHH’s long-term potential.

The key catalysts are:

1. Gleneagles HK to turn EBITDA positive and shorter-than-expected gestation period from other new hospitals,
2. better-than-expected organic performance,
3. turnaround in the situation in Turkey, and
4. positive developments in new markets such as India.

Rachel Lih Rui TAN DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-09-02

SGX Stock Analyst Report BUY MAINTAIN BUY 6.40 UP 6.350