IHH’s earnings to strengthen from 2HFY17 onwards

KUCHING: IHH Healthcare Bhd’s (IHH) earnings are expected to experience significant improvement from the second half of financial year 2017 (2HFY17) onwards as its aggressive expansion plans begin to bear fruit.

In a corporate update, the research arm of MIDF Amanah Investment Bank Bhd ( MIDF Research) expected an earnings expansion in FY18 due to better recognition from the group’s two newest hospitals – Gleneagles Hong Kong and Acibadem Altunizade ( Turkey) with capacities of 500 and 350 beds respectively.

Currently, both hospitals were still impacted by pre- operating expenses, and high depreciation and amortisation costs – leading to anticipated flattish earnings for IHH for its 2QFY17 earnings which would be announced on August 23.

“We believe its 2QFY17 earnings will come in between RM200 to 210 million which is flat on a quarter- over- quarter (q- o- q) basis but higher against the corresponding quarter last year.

“However, we are expecting its earnings to recover in the 2HFY17 as both hospitals gradually ramp up operations and accepting more complex cases which will offset the depreciation and amortisation costs going forward,” said the research arm who explained that the complex cases would be a result from openings of new specialisation wards.

With that said, the research arm has reduced its FY17F earnings for IHH by 23.8 per cent.

Beyond FY17, the research arm expect FY18F earnings to expand significantly by 30.7 per cent y- o-y as it anticipated better recognition from the two new hospitals, lower depreciation and amortisation costs, and more meaningful contribution from its operation in Turkey as Acibadem finally passes its capital expenditure intensive period.

So far, IHH’s aggressive expansion plans which also include a slated late FY18 opening of its 350bed Gleneagles Chengdu hospital, has generated RM5.5 billion worth of debt in 1QFY17.

Despite the significant amount, its balance sheet continued to remain robust with its net gearing ratio at 0.2 against its cash balance of RM2.8 billion. The group’s net gearing ratio is also set to decrease further as the group’s total cash balance is expected to increase to RM3.3 billion due to the disposal of IHH’s 10.68 per cent stake in India’s Apollo Hospitals worth RM566 million.

“We opine that IHH with use this cash balance for potential future acquisitions in line with its expansion strategy. And furthermore, we think that its balance sheet is further secured via natural hedge as most of the borrowings are in the currency of its home markets,” shared the research arm.

In addition, the healthcare giant demonstrated upbeat growth across the board.

“In the first quarter of financial year 2017 (1QFY17), inpatient admissions grew in all markets by 4.1, 3.1, 14.1 and 33.7 per cent year- on-year (y- o-y) in Singapore, Malaysia, India and Acibadem respectively.

“As for revenue per inpatient, all of its home markets recorded an increase of 2.9, 10.8, 3.1 and four per cent y- o-y respectively, reported the research arm who noted that the increases occurred despite persistent soft consumer sentiment.

All thing considered, MIDF Research upgraded its recommendation on IHH to a ‘buy’. It explained, it favoured IHH’s for its resilient demand and growth for healthcare services across all of the group’s home markets, which would continue to drive its earnings growth going forward coupled with the increased contribution from its new hospitals.