IHH Healthcare - Maybank Kim Eng 2019-12-02: Growth Offset By Higher Interest Expense

IHH HEALTHCARE BERHAD (SGX:Q0F)

IHH Healthcare - Growth Offset By Higher Interest Expense

IHH HEALTHCARE (SGX:Q0F)'s 3Q19 results were below our and market’s expectations. Operational earnings growth in 4Q could be slower given the start-up loss at Gleneagles Chengdu.
We reduce our FY19-21E EPS by 5-8%. Consequently, our SOTP-based Target Price is trimmed to MYR5.80 (-8%). Maintain HOLD as IHH Healthcare Share Price has already fallen 8% in 3 months, potentially pricing in the weak 3Q19 results.

Key downside risk may come from an unfavourable outcome of India’s court hearing in Feb 2020, which may see IHH Healthcare reversing its acquisition of 31% stake in Fortis. Prefer KPJ (KPJ MK) for the better risk-reward.

Excluding net positive EIs (exceptional items, totalling MYR34m), 3Q19 core PATMI of MYR202m (-16% q-o-q, -35% y-o-y) brought 9M19 core PATMI to MYR631m (- 8% y-o-y), making up 66%/61% of our and street’s full-year forecasts. The shortfall was due to the recognition of MYR65m fair value loss on forward contracts (to hedge against exchange rate exposures on its net debt).
See IHH Healthcare Announcements; IHH Healthcare Latest News.

On a y-o-y basis, 3Q19 revenue and EBITDA jumped 36% and 22%, based on a constant currency and excluding the MFRS 16 impact. The stronger y-o-y growth was mainly acquisition-led and partially due to organic growth at its existing hospitals.
Note that Fortis (acquired in Nov 2018) accounted for 14% of Group’s EBITDA in 3Q19. However, core PATMI fell 35% y-o-y due to the higher net interest expense and higher tax expense.
On a q-o-q basis, 3Q19 EBITDA grew 7% on better earnings from Singapore, Malaysia and India (including Fortis), which more than offset for weaker earnings from North Asia (including GHK). Turkey’s 3Q19 EBITDA was stable q-o-q.

We lowered our FY19E EPS by 5% to reflect the fair value loss on forward contracts in 3Q19. Our FY20-21E EPS is also lowered by 8% p.a. as we reduce our EBITDA margin assumption by 1-ppt at Singapore, Malaysia and Turkey, to factor in the wage inflation as a result of increased competition for trained healthcare personnel at home markets.

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-12-02

SGX Stock Analyst Report HOLD MAINTAIN HOLD 5.80 DOWN 6.300