IHH Healthcare upgraded on stronger earnings

PETALING JAYA: MIDF Research has upgraded IHH Healthcare Bhd to “buy” from “neutral” in anticipation of a stronger earnings growth of 30.7% in FY18 on better revenue recognition from its two new hospitals, lower depreciation and amortisation cost from FY18 onwards and more meaningful contribution from its operations in Turkey as Acibadem has finally passed its capexintensive period.

Its target price has also been revised to RM7.06 from RM6.58.

MIDF Research said IHH continues to see organic growth in its home markets despite the ongoing aggressive expansion it is currently undertaking. In Q1’17, year-on-year inpatient admissions grew in all markets by 4.1%, 3.1%, 14.1% and 33.7% in Singapore, Malaysia, India and Acibadem respectively.

IHH saw the opening of two new hospitals – Gleneagles Hong Kong and Acibadem Altunizade (Turkey) in Q1, with a capacity of 500 and 350 beds respectively. In late FY18, IHH is slated to open Gleneagles Chengdu in China with a capacity of 350 beds.

Despite incurring preoperating expenses on these two hospitals, MIDF Research opined that earnings will start to strengthen in the 2H17 as the hospitals are expected to receive more patients and more complex cases, with further openings of new specialisation wards. This, in return, will offset the depreciation and amortisation costs associated with the opening of the two hospitals.

As of Q1’17, IHH’s total debt excluding PLife REIT amounted to about RM5.5 billion. Despite that, its balance sheet remains robust with net gearing ratio standing at 0.2 times against its current cash balance of about RM2.8 billion.

With the disposal of a 10.68% stake in India’s Apollo Hospitals for RM556 million, IHH’s cash balance will increase to RM3.3 billion, which MIDF Research expects the group will use it for potential future acquisitions, in line with its expansion strategy.

Having said that, IHH’s Q2 earnings, scheduled to be announced on Aug 23, will continue to be hit by high depreciation and amortisation cost from the recently opened Gleneagles Hong Kong and Acibadem Altunizade.

“We believe its Q2’17 earnings will come in between RM200 million to RM210 million, which is flat on a quarter-on-quarter basis but higher against the corresponding quarter last year.” it said, noting that FY17 earnings forecast has been cut by 23.8% due to the expected increase in depreciation and amortisation cost by 20%.

However, the research house expects IHH’s earnings to recover in the 2H17 as both hospitals gradually ramp up operations and accepting more complex cases, which will offset the depreciation and amortisation costs going forward.