IHH Healthcare Bhd 
(Aug 27, RM5.79)
Maintain neutral with a lower target price (TP) of RM5.96: IHH Healthcare Bhd’s second quarter ended June 30, 2015 (2QFY15) earnings grew 9.1% year-on-year (y-o-y) to RM228.1 million. Despite the growth, its cumulative first half of FY15 earnings of RM399.6 million fell short of ours and consensus expectations, accounting for 39.5% and 42.2% of the full-year forecasts, respectively. 

IHH’s revenue grew 12.2% y-o-y to RM2.1 billion, mainly attributable to higher inpatient admissions and price adjustments. Inpatient admissions at its Singaporean operations grew 5.5% to 17,401. However, its Malaysian and Turkish inpatient admissions reduced 0.5% and 1.1%, respectively, to 47,235 and 32,636. 

On the other hand, average revenue per inpatient admission increased in all three markets, namely Singapore, Malaysia and Turkey, by 4.9%, 14.9% and 24.3%, respectively. The increases were attributable to the price adjustments to compensate for cost inflation and more complex cases undertaken by the hospitals.

Furthermore, IHH has consolidated the earnings of Continental Hospitals Ltd, its India chain, upon the completion of its acquisition in March. Continental contributed RM13.6 million to revenue and RM300,000 of earnings before interest, taxes, depreciation and amortisation (Ebitda) in 2QFY15. 

The Turkish operations’ Ebitda decreased 12.7% quarter-on-quarter. The decrease was mainly due to a provision made for doubtful receivables from a particular debtor and a legal case amounting to RM14 million (approximately RM7 million each). 

We are revising our earnings forecasts for FY15 and FY16 downwards by 19.6% and 19.8% respectively. Our revisions are based on higher operating expenses, staff costs and finance costs, lower Ebitda from the Turkish market and contracting profit margins.

We are maintaining our “neutral” stance with a revised TP of RM5.96 per share. The lower TP is premised on the notion that we are expecting rising operating expenses and staff costs, which will most likely cause a drag in the company’s Ebitda. Our discounted cash flow valuation is based on a terminal growth rate assumption of 4.5%, a risk-free rate of 4% and a required rate of return of 9%. — MIDF Research, Aug 27

This article first appeared in digitaledge Daily, on August 28, 2015.