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
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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