IHH Healthcare Bhd
(April 19, RM5.56)
Maintain buy with a higher target price of RM6.49: Despite the lingering concerns over an impairment risk on its 31% stake in Fortis Healthcare Ltd, and the weakening of the Turkish lira, we think that IHH Healthcare Bhd’s overall positives still outweigh the negatives. We expect IHH to continue delivering stronger earnings moving forward on the back of its strong execution and healthy prospects.

 
IHH staged a strong earnings recovery in 2018 as core net profit grew by 73% year-on-year (y-o-y) to RM1 billion. While we do not rule out the possibility of any adjustment or impairment on Fortis given the ongoing investigations, we think that the chances of goodwill impairment stemming from Fortis’ profitability are diminishing as management has taken several measures to enhance profitability — lower borrowing costs and clinical establishment cost savings. Besides, for its Acibadem Altunizade operations, while we acknowledge that there is always a risk of foreign exchange volatility of the Turkish lira against the ringgit, Acibadem’s operations have remained resilient, with five-year compound annual growth rates (CAGRs) for inpatient admission and revenue per inpatient of 14% and 10% respectively.

We reduce our financial year 2019 (FY19)-FY21 earnings per share estimates by 18%-24% as we: 1) postpone our earnings before interest, taxes, depreciation and amortisation (Ebitda) break-even forecast for Gleneagles Hong Kong by one year to FY20 (from FY19); ii) adjust our currency assumptions mainly to account for the weakening of the Turkish lira against the ringgit; and iii) impute a higher interest rate from the swap into local Turkish lira-denominated loans. Despite lowering our earnings estimates, our sum-of-parts-based TP has been increased from RM6.36 to RM6.49 as we incorporate Fortis’ operation post completion of the 31% stake acquisition, which we believe should be positive in the long run. We forecast a three-year core earnings CAGR of 15% and maintain our “buy” rating on IHH.

IHH’s Singapore operations remain as the largest contributor and backbone of the group, contributing about 49% of total Ebitda and a whopping 85% of total profit after tax and minority interest in 2018. While its inpatient admission in Singapore grew by only 1% to 76,917 in FY18, its average revenue per inpatient rose 9% y-o-y to RM31,440 in FY18. Notably, the Ebitda margin improved by 170 basis points y-o-y to 31.2% in 2018.

With most of its licensed beds in Singapore are already fully ramped up, the group aims to further improve its hospital bed turnover rate by introducing more precise and advanced treatment methods, which will help achieve better clinical outcome, shorten the length of stay, and hence improve the yield per bed. For instance, the group is exploring Proton Beam therapy to improve its cancer treatment solutions and plans to introduce a Proton Beam Therapy Centre at Mount Elizabeth Novena Hospital in 2021. Proton therapy is considered the most advanced form of radiotherapy in the fight against cancer, able to kill cancer cells with far less damage to surrounding healthy tissues and nearby organs, and hence will result in a faster recovery.

Moreover, the ageing population in Singapore is leading to multiple treatments per visitation and a higher medical bill size per patient. In Singapore, the population is ageing rapidly due to the longer life expectancy (2017: 83.1 years) and low birth rate (2018: 1.14). The percentage of senior residents aged 65 and above in Singapore stood at 13.7% in 2018. The aged population grew at a 2013-2018 CAGR of 6%, exceeding the average population growth rate in Singapore of 1% over the same period. The median age of the resident population also continued to rise, reaching 40.8 years in 2018. In addition, with the average occupancy rates at Singaporean public hospitals remaining high at around 80%-90%, we expect the spillover of patients from public hospitals to private hospitals to continue benefiting IHH.

IHH’s Malaysian operations saw 10% growth in FY18 revenue, driven by a 3% growth in inpatient volume and a 6% increase in average revenue intensity per inpatient. Similar to that of its Singaporean operations, the Ebitda margin for the Malaysian operations improved 60 basis points y-o-y to 28.6% in 2018. With most of its mature hospitals registering Ebitda margins of more than 30%, we believe that the continual ramp-up of its young hospitals such as Gleneagles Medini and Gleneagles Kota Kinabalu should drive further Ebitda margin improvement. — Affin Hwang Capital, April 19