IHH Healthcare Bhd
(Nov 26, RM4.97)
Maintain “hold” with a fair value of RM4.30: We reaffirm our “hold” recommendation on IHH Healthcare, with an unchanged fair value of RM4.30 per share based on a sum-of-parts valuation.

The nine months ended Dec 31 of financial year 2014 (9MFY14) core earnings of RM541 million were within expectations — accounting for 72% and 70% of our and consensus full-year estimates given that the third quarter is a seasonally weak quarter.

IHH’s solid performance year-on-year (y-o-y) continues to be driven by higher inpatient volumes — Singapore (+12%), Malaysia (+10%) and Turkey’s Acibadem Healthcare Group  (+11%) — and higher revenue intensity — Singapore (+3%), Malaysia (+8%) and Acibadem (+2%).

In addition to more complex cases, the price adjustments in Singapore and Malaysia have contributed to the stronger average revenue per inpatient admission.

Earnings before interest, taxes, depreciation and amortisation (Ebitda) margins improved by 0.7 percentage points despite the start-up losses arising from new hospitals opening and higher staff cost (+13% y-o-y) underpinned by operating leverage, ramp-up of operational efficiency and savings on consumables.

More importantly, Singapore’s Mount Elizabeth Novena Hospital saw significant revenue growth of 72% y-o-y and Ebitda growth of more than 100% y-o-y boosted by operational efficiency. We expect the stronger ramp-up moving forward to drive revenue and the progressive opening of additional wards.

Despite the softening of tourist arrivals from Indonesia seeking healthcare in Singapore, IHH saw increased foreign patients from other markets such as the Middle East and Myanmar.

Typically, Indonesia patients constitute about 40% to 50% of Singapore’s medical tourism revenue. The bulk of Singapore’s revenue (60%) is anchored by the domestic market.

The stronger appreciation of the Singapore dollar continued to offset the weakening of Turkey’s lira. Acibadem’s exposure in US dollars continues to be hedged through medical tourism receipts in US dollars and substantial US dollar cash buffer.

The balance sheet remained strong with net gearing at 0.1 times and cash pile of RM2 billion as at 9MFY14.

While we like IHH’s expansion front, slick execution and positive prospects riding on the rising healthcare demand, valuation is expensive, trading at a forward price-earnings ratio of 43 times, at a premium to its peers. — AmResearch, Nov 26

This article first appeared in The Edge Financial Daily, on November 27, 2014.