Outlook for IHH Healthcare draws mixed views

FOLLOWING the recent release of IHH Healthcare Bhd’s financial results, the issue that’s on most investors’ minds is whether the worst of the recent news coming out from IHH Healthcare Bhd has already been factored into its immediate outlook.

The company recently reported a set of financial results that reflected the realities of the numerous startup costs that it has to bear from the numerous expansion plans that are being put into motion.

IHH’s revenue rose by 15% year-on-year (y-o-y) in the third quarter ended Sept 30 of the financial year 2017 to RM2.8bil but net profit fell by some 53% y-o-y to RM82.1mil.

Topline numbers were boosted by the additional inpatient admissions and new hospitals as a result of hospital group’s expansion.

But the company says its bottomline was weighed by the higher depreciation, amortisation and finance costs from the opening of new hospitals in Hong Kong and Istanbul, Turkey in March this year.

The biggest hospital group in Asia also warned investors on its outlook that it expects to face cost pressures on several fronts in the year ahead.

The cost pressures are expected to come from wage inflation from increased com- petition for talent, rising purchasing costs due to the stronger US dollar and higher pre-operating costs and start-up costs from new operations which would partially put a dent on profitability in the initial stages.

“To mitigate these effects, IHH will remain prudent in its cost management, undertake ways to improve the mix of higher revenue intensity cases and ramp up new facilities to achieve optimal operating efficiencies,” the company notes.

Interestingly, despite the fall in bottomline by a huge 53% and the warning that was sounded by its management, its stock continued to hold up well.

This indicated that investors were quick to snap up the stock on the open market as soon as it fell below the RM5.60 price level.

This is evidently seen when prices were strongly supported on the day after its results were announced (Tuesday) where strong buying interest when selling reached its short term climax at RM5.42 preventing the stock from falling any further.

While net profit fell drastically, earnings before interest, taxes, depreciation and amortisation (Ebitda) grew by 3% in the third quarter to RM562.4mil from the previous year.

The ebitda metric is sometimes the preferred gauge to value capital and asset intensive companies.

IHH, which has been on a downtrend in the past year or so, had lost some 15.14% of its share price due to cost pressures evident from the starting up of Gleneagles Hong Kong while in the year-to-date, it fell by some 11.18%.

Analysts who cover the stock are still quite divided on their recommendations cumulatively.

Most or 50% (13) polled on the Bloomberg are still on the buy camp while 42.3% (11) of analysts were recommending people to hold the stock instead and another 7.7% (2) told its clients to sell the stock.

In its report a day after the company’s results were announced, Morgan Stanley Research notes that the third quarter saw the first ebitda growth in three quarters.

“Core ebitda of RM562mil met our RM567mil estimate.

“The top line was 3% higher than we expected, while operating costs were 6% above our forecasts.

“However, core net profit was 35% below our estimates on higher than expected unrealised foreign exchange losses and higher than expected income taxes,” Morgan Stanley Research says.

“With IHH’s underperformance, the risk to reward looks favourable.

“We reiterate our view that Gleneagles Hong Kong is a good asset, and will contribute meaningfully to IHH’s bottom line and valuation once demand matures.

Core markets also continue to perform well, providing a strong earnings cushion,” it adds.

Morgan Stanley, which has an “overweight” rating on IHH and a price target of RM7.04, also notes that 2018’s forecast enterprise value to ebitda is now at circa 16 times.

This is in line with listing valuations, and below the Asean average of 21 times.

Meanwhile, Credit Suisse in its report notes that IHH management stated that patient volume has risen by more than 40% from the previous month and that revenue intensity is just slightly below Parkway Pantai Ltd Singapore (RM29,900) due to more complex cases.

Credit Suisse notes that insurance coverage uptick could be a potential positive catalyst moving forward.

Its adds that the China and Hong Kong market segment’s third quarter ebitda loss was flattish in the quarter-on-quarter at RM72mil, while revenue grew by 69% to RM24.3mil.

Additional key launches in Chengdu (350-bed) and Shanghai (450-bed) are anticipated to play out in the second half of next year and late 2019 respectively.

While additional hospital expansions for China in the future could add further strain with its startup costs, the potential returns once all these new hospitals grow to a critical mass would mean even more growth for the company.