27 October 2014 Buy on expansion We upgrade IHH to ADD with a higher target price of RM5.50 mainly due to earnings upgrade. The upgrade is on the back of capacity expansion in its Malaysia and Turkey operations, which are expected to register 25% and 32% additional bed capacity respectively by end15 and improving margins on operating leverage. Raising earnings forecast to reflect expansion plans We raised our 2014E-16E earnings forecast by 9-21% after: i) updating the audited 2013 accounts and operating statistics; ii) factoring in its expansion plans for Malaysia and Turkey operations for 2015 and 2016 and; iii) higher EBITDA margins assumptions by 0.7ppt -2.9ppt. Parkway Malaysia to add 25% bed capacity by end-15 Parkway Malaysia is scheduled to open two Greenfield hospitals in 2015, which are the Gleneagles Kota Kinabalu and Gleneagles Medini (Fig 2) with a capacity of 250 beds and 150 beds respectively. The expansion of Gleneagles Kuala Lumpur is expected to complete by end-14, with an additional 100 beds. In total, Parkway Malaysia will have an additional bed capacity of 25% by end-15. Acibadem aggressive with 32% additional capacity by end-15 IHH’s Turkey operation, Acibadem Holdings is targeting to open two new hospitals in 2015 (Fig 3). It is also scheduled to add new bed capacity at three of its existing hospitals by end-14 and in 2015. In total, Acibadem is targeting to increase its total bed capacity by 32% by end-15. Regional valuation gap narrowing Following the 9-21% earnings upgrade, we have raise IHH’s target price to RM5.50 (RM4.00 previously), based on a revised 22x 2015E EV/EBITDA (30% premium to regional peers). The premium is justifiable given its premium offering and huge market capitalisation (40% larger than Bangkok Dusit). Over the past 6 months, the valuation gap between regional peers and IHH has narrowed. Upgrade to ADD with a target price of RM5.50 IHH has consistently executed its expansion plans well and improved its revenue/patient. We view IHH as a long term value play with strong fundamentals coupled with the group’s extensive regional network. As such, we upgrade IHH to ADD from Reduce previously. Earnings & Valuation Summary FYE 31 Dec 2012 Revenue (RMm) 6,962.5 EBITDA (RMm) 1,295.5 Pretax profit (RMm) 1058.0 Net profit (RMm) 750.8 EPS (sen) 10.7 PER (x) 46.5 Core net profit (RMm) 353.4 Core EPS (sen) 4.4 Core EPS growth (%) 43.9 Core PER (x) 46.5 DPS (sen) 0.0 Dividend Yield (%) 0.0 EV/EBITDA (x) 24.6 2013 6,756.5 1,721.2 881.6 631.2 7.8 64.1 602.5 8.6 95.4 64.1 2.0 0.4 23.4 Chg in EPS (%) Affin/Consensus (x) 2014E 7,159.6 1,889.2 1,078.7 755.1 9.4 53.1 755.1 9.4 9.3 53.1 1.9 0.4 22.5 2015E 7,768.2 2,129.2 1,271.2 889.9 11.0 45.1 889.9 11.0 17.9 45.1 2.2 0.4 20.0 2016E 8,432.3 2,406.3 1,507.8 1055.4 13.1 38.0 1055.4 13.1 18.6 38.0 2.6 0.5 17.7 8.8 1.0 20.4 0.9 21.2 0.9 Company Update IHH Healthcare IHH MK Sector: Healthcare & Pharmaceuticals RM4.98 @ 24 October 2014 ADD (upgrade) Upside 10% Price Target: RM5.50 Previous Target: RM4.00 Price Performance 1M -0.4% +0.8% Absolute Rel to KLCI 3M +4.8% +8.2% 12M +19.4% +19.3% Stock Data Issued shares (m) 8,178.6 Mkt cap (RMm)/(US$m) 40,729/12,442 Avg daily vol - 6mth (m) 4.4 52-wk range (RM) 3.45-5.12 Est free float 15% BV per share (RM) 2.25 P/BV (x) 2.21 Net cash/ (debt) (RMm) (2Q14) (2,029) ROE (2015F) 5.4% Derivatives Nil Shariah Compliant Yes Key Shareholders Khazanah Nasional Mitsui 43.8% 20.2% Source: Affin Hwang, Bloomberg Sharifah Farah (603) 2145 0327 [email protected] Source: Company, Affin Hwang estimates Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 1 of 5 27 October 2014 Low gearing – room to gear up The estimated total capital expenditure for the planned expansion between 2H14-2016 is RM3.4bn. We gather that this will be funded by both internal as well as bank borrowings. As at end-June 14, the group’s net gearing level stood at 0.1x, suggesting it has ample room to further gear up. Forecast 5-8% inpatient admission growth Overall, we forecast between 5%-8% inpatient admission growth and 5% revenue/inpatient growth in 2014E-2016E for all its three home market operations – Malaysia, Singapore and Turkey (Fig 5). With c.15% market share, Parkway Malaysia operates 12 hospitals with more than 2,000 licenced bed capacities. Meanwhile, Acibadem operates 17 hospitals with more than 2,000 licensed bed capacities. Sustainable strong margins on operating leverage IHH’s EBITDA margins remain resilient at >26% in 1H14 vs. our previously conservative estimate of 24%-26% for FY14-16E, despite start-up losses of new hospitals. This is due to operating leverage as well as increasing revenue per patient. We sense that this higher margin is sustainable, and has room for further improvements. Hence, we raise FY14-16E EBITDA margin by 0.7ppt -2.9ppt from our earlier conservative assumptions. Budget 2015 exempts medicine from GST In addition, under the Budget 2015, the government has identified almost 2,900 types of medicine to be exempted from GST. This is positive for healthcare operators, as inventories and drugs account for 20-25% of operating cost; and IHH stands out as a beneficiary. Risk to recommendation Risks to our recommendation include: i) political and currency risk due to group’s regional presence, ii) margin compression as costs escalation grow faster than revenue growth due to expansion. Fig 1: Regional peer comparison Source: Affin Hwang, Bloomberg Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 2 of 5 27 October 2014 Fig 2: Parkway Malaysia expansion plans Source: Company Fig 3: Acibadem expansion plans Source: Company Fig 4: Non-home markets expansion involvement Source: Company Fig 5: IHH key assumptions Source: Company, Affin Hwang Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 3 of 5 27 October 2014 IHH - FINANCIAL SUMMARY Source: Affin Hwang estimates, IHH Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 4 of 5 27 October 2014 Equity Rating Structure and Definitions BUY Total return is expected to exceed +15% over a 12-month period TRADING BUY (TR Total return is expected to exceed +15% over a 3-month period due to short-term positive development, but fundamentals are not strong enough to warrant a BUY) Buy call. This is to cater to investors who are willing to take on higher risks ADD Total return is expected to be between 0% to +15% over a 12-month period REDUCE Total return is expected to be between 0% to -15% over a 12-month period TRADING SELL (TR SELL) Total return is expected to exceed -15% over a 3-month period due to short-term negative development, but fundamentals are strong enough to avoid a Sell call. This is to cater to investors who are willing to take on higher risks SELL Total return is expected to be below -15% over a 12-month period NOT RATED Affin Investment Bank does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation OVERWEIGHT Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) (“the Company”) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company’s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) A Participating Organisation of Bursa Malaysia Securities Bhd Chulan Tower Branch, 3rd Floor, Chulan Tower, No 3, Jalan Conlay, 50450 Kuala Lumpur. www.affininvestmentbank.com Email : [email protected] Tel : + 603 2143 8668 Fax : + 603 2145 3005 Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 5 of 5
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