Hiccups at Turkish ops not hurting IHH

Analysts are more interested in the group’s expansion initiatives

PETALING JAYA: IHH Healthcare Bhd’s short-term hiccups from the foreign exchange effect on its Turkish operations are not expected to have a lasting impact on the group’s prospects.

In fact, analysts are more focused on the expansion initiatives that the giant hospital group is undertaking, rather than the volatility from the US dollar and euro debt incurred by IHH’s 60%-owned Acibadem Holdings.

In a recent report, Maybank Kim Eng Research said three new hospitals with 1,175 beds to be opened in 2017 would drive growth for IHH.

IHH did not open any new hospitals last year.

“This includes the 500-bed Gleneagles Hong Kong (Gleneagles HK) and 350-bed Acibadem Altunizade in Istanbul, both operational since March, as well as the 350-bed Parkway Health Chengdu Hospital in the second half of the year,” said Maybank Kim Eng Research.

With 350 beds across 98,000 sq m, Acibadem Altunizade Hospital is Acibadem’s largest hospital in Turkey.

Meanwhile, RHB Research Institute remained positive on IHH’s strong earnings growth outlook, highlighting that the group is expected to open a 350-bed greenfield hospital in Chengdu, China, next year.

Despite IHH’s aggressive expansion plans, its balance sheet remains healthy, with a net gearing of 0.2 times as at the first quarter of 2017.

However, RHB Research believed that there would be an impact on the group’s quarterly earnings in the first half of the year stemming from start-up losses from Gleneagles HK, which began operations in March 2017.

“Earnings accretion should start coming through the second half of the year as operations ramp up.

“Gleneagles HK has signed on an estimated 600 visiting consultants, allowing for the doctors to admit patients into the hospital.

“The hospital is expected to offer packaged medical services to patients under insurance schemes in June and launch its radiation oncology services in the second half of the year, which should boost its revenue intensity further,” said RHB Research.

To this, Maybank Kim Eng Research guided that Gleneagles HK’s cost is likely to accelerate in the second quarter of the year, as more specialties like oncology and radiology come on board.

In addition, the hospital will only see more patients beginning early June 2017, as the earlier phase only focuses on less complex medical cases.

For the first quarter ended March 31, 2017, IHH registered a net profit of RM470.05mil, which doubled on a year-on-year basis, following a RM313.4mil gain from the group’s divestment of a non-core 6.07% stake in Apollo Hospitals.

IHH continued to see strong inpatient admissions and revenue intensity growth across its core markets in Singapore, Malaysia, India and Turkey during the quarter.

The group’s 4.1% year-on-year inpatient admission growth in Singapore was driven by an increase in local patients.

Its average revenue per inpatient admission (revenue intensity) rose 2.9% to RM29,666.

Besides that, its inpatient admissions for Malaysian hospitals increased by 3.1%, while revenue intensity improved by 10.8% to RM6,185 per patient as the group continued to take on more complex cases.

In a statement issued along with IHH’s first quarter results, the group said it “adopts natural hedges where possible and continues to explore all options to ‘de-risk’ currency exposure for Acibadem”.

According to the latest financial statements, Acibadem had loans and borrowings amounting to RM3.38bil as well as total liabilities of RM4.19bil, with cash and cash equivalents totalled at RM573.3mil.

IHH’s move to de-risk loan exposure for Acibadem, which are mainly denominated in US dollar and euro, comes as part of prudent capital management to further spread currency risk.

This includes converting some of Acibadem’s foreign-denominated loans to lira-denominated ones, to diversify the group’s borrowing mix and corresponding currency exposure.

Foreign businesses operating in Turkey generally obtain loans in foreign currency instead of the Turkish lira due to its shallow market and short tenure.

Acibadem has remained a solid performer since it became part of the IHH stable.

The Turkish lira has come under tremendous selling pressure of late and is the world’s second-worst-performing currency last year due to political uncertainties, rising inflation and terrorist attacks.

The lira is now hovering at record lows against the US dollar after it plunged to almost 3.8 to the dollar earlier last week.

In addition, IHH’s medical receipts that are transacted in US dollar or euro enables the group to preserve hard currency and, in turn, reduce currency risk.

According to its 2016 annual report, 35.8% or RM2.62bil of IHH’s loans were denominated in US dollar and euro, of which euro-denominated loans amounted to RM2.06bil (28.1%) while US dollar-denominated loans totalled RM564.18mil (7.7%).

IHH chief financial officer Low Soon Teck said the group fully intended to maintain its leadership position in Turkey, being one of its home markets.

He said it remained a dynamic and strategically located market that would help the group capture growth across the region.

He said that over the past two decades, Acibadem had consistently performed resiliently despite periods of marked macro uncertainty in the region.

“It has remained a solid performer since it became part of the IHH stable. What we saw over the past few months was that financial institutions were awaiting clarity from the Turkish referendum.

“Now that the referendum is over and with recent initiatives aimed at spurring growth, liquidity has returned to the market.

“This means we should be in a better position to explore options to de-risk our lira loan exposure,” said Low.