IHH Healthcare - Maybank Kim Eng 2019-09-02: Operating Profit Growth Offset By Higher Interest Cost

IHH HEALTHCARE BERHAD (SGX:Q0F)

IHH Healthcare - Operating Profit Growth Offset By Higher Interest Cost

IHH HEALTHCARE BERHAD (SGX:Q0F)'s 2Q19 earnings were stronger q-o-q, but still below our/market’s expectations.
We reduce our FY19-21F EPS by 7% p.a. as we raise our depreciation assumption and update our model for 1H19 results. Consequently, our SOP-based Target Price is trimmed to MYR6.30 (-3%) and we downgrade the stock to HOLD (from BUY).
IHH Healthcare's share price has gained 7% YTD and risk-reward is balanced with its 12M fwd P/E at 46x, its 5-year mean.

Excluding net negative EIs totaling MYR55m, 2Q19 core PATMI of MYR240m (+28% q-o-q, -6% y-o-y) brought 1H19 core PATMI to MYR429m (+14% y-o-y), at just 42%/41% of our/street’s full-year estimates. The shortfall was due to higher depreciation due to MFRS16 which had a total negative net impact of 7% on PATMI.
On a y-o-y basis, IHH Healthcare's 2Q19 revenue and EBITDA jumped 38%/31%, based on a constant currency and excluding the MFRS16 impact. However, core PATMI was weaker (-6% y-o-y) on MFRS 16 impact and higher interest expense (+1.8x y-o-y) for the 31% acquisition of Fortis.

All ops registered stable 2Q19 earnings on a q-o-q basis, (SG, MY, Fortis, Gleneagles HongKong), except Turkey (EBITDA: -20% q-o-q; EBITDA margin: -3.3-ppt q-o-q). We think the weaker Lira has resulted in high cost inflation, especially on consumables/ pharmaceuticals (mostly imported) and staff costs.
Also, on top of the seasonality factor, the steep ASP adjustment in early-2019 (c.+29%) may have also contributed to the lower inpatient volume (-7% q-o-q). That said, on a constant currency basis and ex-MFRS16, Turkey’s EBITDA growth was still solid (+44% y-o-y).

We expect group earnings to be just slightly better ahead as improved earnings from Fortis and Gleneagles HongKong could be offset by start-up loss at Gleneagles Chengdu (to open in 4Q19). Also, FX drag from Acibadem would be less pronounced as the group has further reduced its foreign debt to

Management expects the beds to 180 (+20%). The ongoing demonstrations in Hong Kong may demand for fixed price packages, which are more attractive in pricing.
In 2Q19, occupancy rate fell to 62% (1Q19: 68%, 2Q18: 40%), largely due to the seasonal factor where many doctors were away for summer holiday.
In China, Gleneagles Chengdu Hospital is on track to open Gleneagles Shanghai, the construction work is ongoing and is slated to open in 4Q20.
Our earnings model assumes:
1. Gleneagles HongKong – EBITDA loss of MYR140m in FY19F and breakeven in FY20F;
2. Gleneagles Chengdu – EBITDA loss of MYR80m and MYR180m in FY19 and FY20F respectively; and
3. Gleneagles Shanghai – EBITDA loss of MYR80m in FY20F.
In total, our earnings model has imputed a total EBITDA loss of MYR220m/MYR260m/MYR230m in FY19-21F for Gleneagles HongKong and the 2 new hospitals in China.

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-09-02

SGX Stock Analyst Report HOLD DOWNGRADE BUY 6.3 DOWN 6.500