This article first appeared in The Edge Financial Daily on August 30, 2018

IHH Healthcare Bhd
(Aug 29, RM5.55)
Maintain hold with a lower target price (TP) of RM6.16: IHH Healthcare Bhd’s core earnings for the first financial half ended June 30, 2018 (1HFY18) of RM403.9 million (-6.8% quarter-on-quarter [q-o-q]; +4% year-on-year [y-o-y]) were slightly below our and consensus expectations due to higher finance cost and start-up costs of newly opened hospitals. Its 1HFY18 revenue of RM5,514.7 million translated into core earnings of RM403.9 million, making up 44.5% of our and 45.8% of consensus expectations. Our forecasts have been reduced by 4.8% to 6.8% for FY18 to FY20 as we calibrated our Turkish lira assumptions in light of recent volatility.

Revenue for the second quarter of FY18 (2QFY18) declined 6.8% q-o-q to RM2.65 billion (1QFY18: RM2.86 billion) due to strengthening of the ringgit against the currencies of its other operating markets, while earnings before interest, taxes, depreceiation and amortisation (Ebitda) declined by 13.3% q-o-q to RM527.9 million on higher operating costs. Excluding the impact of currency erosion from other operating markets, Ebitda declined about 7% on higher cost of purchase and operating costs incurred in US dollars and euros. Core profit after tax and minority interest (Patmi) eroded by 20% due to a higher base q-o-q of foreign exchange effects on greenback-denominated cash (+RM103 million for 1QFY18 versus -RM77.1 million for 2QFY18).

On a constant currency basis, revenue rose 14% y-o-y on contributions of new hospitals — Gleneagles Hong Kong (GHK) and Acibadem Altunizade in Istanbul — organic growth and a ramp-up in hospitals opened in 2017. Ebitda increased 13% y-o-y. Core Patmi improved by 108.1% to RM179.4 million on a low base in 2QFY17 due to higher start-up costs of GHK and Altunizade, coupled with the removal of a gain on disposal of the stake in Apollo Gleneagles Hospitals in Kolkata (RM241 million).

Year to date, revenue has grown marginally by 1.1% to RM5.15 billion despite a stronger operational performance across all home markets, thanks to a stronger ringgit against currencies of other home markets. Ebitda has grown 3% to RM1.14 billion. On a constant currency basis, its top line has grown 15%, while Ebitda has grown 14% y-o-y. The better performance y-o-y was attributed to the ramp-up in operations of hospitals opened in 2017, organic growth of existing hospitals and, to a lesser extent, the narrowing of losses from GHK (-RM94.5 million versus -RM128.1 million). Core Patmi has improved by 40.3% y-o-y on the back of a low base for 1HFY17. Management said the recent depreciation in lira had seen an influx of medical tourist numbers, with about 30% of medical tourist volumes being private insurance patients.

Our FY18 to FY20 earnings forecasts have been reduced by 4.8% to 6.8%. Our TP implies FY19 to FY20 enterprise value/Ebitda of 15.5 times to 13.8 times. While we like IHH for its exposure to key gateway markets and astute management, earnings delivery for FY18 will be hampered by higher operational costs before a ramp-up in operations in FY19. — Hong Leong Investment Bank Research, Aug 29