This article first appeared in The Edge Financial Daily on April 25, 2018

IHH Healthcare Bhd
(April 24, RM6.09)
Maintain buy with a target price (TP) of RM7.10: We met up with 13 investors in Singapore over a one-day non-deal roadshow in March. Their interest in IHH Healthcare Bhd centred mainly on the business outlook for existing home markets, performance of Gleaneagles Hong Kong Hospital (GHK), and IHH’s strategy and direction in the Indian market. We came away positive about IHH’s earnings recovery in 2018, underpinned by the ramp-up of new hospitals and improving profitability from its existing home markets.

For both the Singaporean and Malaysian operations, we expect revenue to be driven by around a mid-single-digit inpatient volume growth and 5%-10% growth in revenue intensity per inpatient. An ageing population and complicated surgical cases are positive drivers of IHH’s sales. Coupled with the continued ramp-up of new hospitals, we expect earnings before interest, taxes, depreciation and amortisation margin to improve towards the 30% level (2017: 28%). We are positive about 40%-owned Acibadem’s plan to halt greenfield expansions after the completion of the two hospitals and to focus on ramp-up of its hospitals.

IHH has announced that its bid offer of 160 rupees (RM9.40) per share for Fortis Healthcare had been declined by the board, but we believe that Fortis shareholders will still favour IHH’s higher offer price. Acquiring Fortis at the right valuation will provide a quick penetration into India’s healthcare market despite some short-term earnings drag. We believe that IHH’s experience would help turn around Fortis’ performance.

We reaffirm our “buy” rating on IHH with a 12-month discounted cash flow-derived TP of RM7.10. Post the 31% decline in 2017 core net profit, we believe that the worst is over and that IHH should benefit from an earnings recovery driven by the ramp-up of new hospitals. — Affin Hwang Capital Research, April 24