IHH Healthcare - 9M16 Expect A Flat 2016 On Continued Cost Pressure
- IHH Healthcare’s (IHH) 9M16 adjusted earnings track below our and consensus forecasts.
- While revenue growth remained strong, it was exceeded by staff costs, pre-operating expenses and start-up costs in new hospitals. We lower our 2016-17 net profit estimates by 1-3% to account for higher operating costs.
- Going forward, we expect cost pressure to continue on the back of expansion plans, helped by the ramp-up of new hospitals opened in 2014 and 2015.
- Maintain HOLD with a lower SOTP target price of S$2.03 (previously S$2.14). Entry price: S$1.80.
9M16 adjusted net profit below our and consensus estimates.
- IHH Healthcare’s (IHH) 9M16 net profit grew 26% yoy to RM654.9m due to exceptional item of RM11.3m (arising from the group’s divestment of its 90% stake in Shenton Insurance as well as an exchange loss from the translation of its non-Turkish lira-denominated borrowings)
- Excluding exceptional items, adjusted net profit of RM643.5m (-6% yoy) would have tracked below our expectation, representing 67% of our full-year estimate.
Top-line bolstered by organic growth and new acquisitions.
- 9M16 revenue increased 20% yoy to RM7.4m due to the ramping up of operations at Gleneagles Kota Kinabalu, Acibadem Taksim and Gleneagles Medini.
- Recent acquisitions such as Global hospitals (Dec 15) as well as the Bulgaria Tokuda and City Clinic Group (Jun 16) also contributed to top-line growth.
Unsurprisingly, cost pressure continues.
- Earnings continued to be dragged by cost pressure in 9M16 - inventories/consumables rose 28% yoy and staff costs grew 20% yoy due to wage inflation.
- Additionally, earnings were impacted by start-up losses (RM16.2m) from new hospitals in Malaysia as well as pre-operating expenses (RM34.2m) to prepare Gleneagles Hong Kong.
- Nevertheless, we expect IHH to offset the impact of these higher cost pressures through higher revenue- intensity procedures, cost optimisation and tighter cost control.
Earnings helped by largest home market.
- Singapore (15% yoy rise in 3Q16 EBITDA) remained strong operationally as inpatient volume increased 13.6% yoy in 3Q16.
- We understand the volume increase was largely due to local admissions, which also drove down average revenue per inpatient admissions slightly (-3% yoy) as local patients typically do less revenue-intensive procedures. Nevertheless, Mount E Novena continued to see a nice ramp-up, where we understand some 280 beds have opened and all 333 beds are set to open by 1H17.
Strategic partnership with Taikang.
- IHH announced recently that it is divesting a 29.9% stake in the holding entity (PCH) for its China portfolio to China-based Taikang Insurance Group for Rmb1.1b. Following the acquisition, Taikang will be jointly responsible for the funding of the projects to be undertaken by PCH going forward.
- We view this partnership positively as we believe it will serve as a platform to broaden IHH’s footprint in China where the group can benefit from access to Taikang’s distribution network through referrals of policy holders (>167m client base).
- The partnership could also help IHH reduce operational risk in China, drawing on the strengths of Taikang in healthcare and insurance.
- We reduce 2016-17 net profit forecasts by up to 3% to reflect higher operating staff cost.
- Maintain HOLD with a lower target price of S$2.03 (previously S$2.14), based on our sum-of-the-parts (SOTP) model.
- While we like IHH’s growth strategy and its geographically diversified revenue streams, we believe current valuation at 44.2x 2017F PE reflects that. IHH is currently trading above the industry’s PE of 36x.
- Nevertheless, we think the group’s capacity in new markets such as Hong Kong, China and India will provide growth runway for the next 5-10 years. Entry price is $1.80.
- Key risks include:
- execution risk,
- forex risk,
- inflationary pressures on operating expenses, and