COMPANY UPDATE

Thursday, October 04, 2018

FBMKLCI: 1,796.30
Sector: Healthcare

THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY*

IHH Healthcare Berhad TP: RM5.60 (+7.7%)

Last Traded: RM5.20
Operations Intact but Lira Still a Concern Hold
Tan Kam Meng, CFA Tel: +603-2167 9605 kmtan@ta.com.my www.taonline.com.my

Key takeaways from our recent meeting with IHH’s management team Share Information
include: i) strategies to minimise the impact of Turkish Lira depreciation, ii) Bloomberg Code IHH MK
Stock Code 5225
updates on operations and acquisition in India; and iii) Amanjaya Specialist
Listing Main Market
Centre acquisition is expected to contribute positively to group’s earnings. Share Cap (mn) 8,244.8
We cut our earnings estimates by -17.1%/-23.5%/-29.5% for FY18/19/20 after Market Cap (RM'mn) 42,873.0
adjusting the financing cost higher and Turkish Lira lower. We maintain our 52-wk Hi/Lo (RM) 6.42/4.96
12-mth Avg Daily Vol (000' shrs) 5,546.1
Hold call with a lower TP of RM5.60/share (from RM6.03/share).
Estimated Free Float (%) 19.3
Beta 0.65
Strategies to minimise the impact of Lira depreciation Major Shareholders (%)
YTD, Turkish Lira has weakened against Ringgit and USD by 34.6% and 37.0% Khazanah Nasional Bhd - 40.3
Mitsui & Co Ltd - 18.0
respectively. This is expected to hit IHH’s 60%-owned subsidiary, Acibadem in
EPF - 9.1
Turkey, badly due to mismatch of revenue and finance cost. Note that Acibadem’s Central Depository - 5.1
revenue is 90% denominated in Lira while its interest cost is mainly denominated
in Euro and dollar. This mismatch has boosted Acibadem’s 1H18 losses to Forecast Revision
FY18 FY19
RM197.3mn versus RM33.2mn losses in 1H17. According to management,
Forecast Revision (%) (17.1) (23.5)
Acibadem achieved satisfactory performance for 1H18 in terms of in-patients and Net profit (RM'mn) 663.1 727.1
revenue per patient, which grew 11.2% and 44.7% YoY respectively. The losses of Consensus 792.5 1,077.0
RM197.3mn from Acibadem were driven mainly by the weakening Lira factor. TA/Consensus (%) 83.7 67.5
Previous Rating Hold (Maintained)

To mitigate the impact, IHH is mulling over various options to restructure its Financial Indicators
Acibadem’s balance sheet and operations. These include: i) swapping its Euro and FY18 FY19
dollar loans to Lira, which we believe can only be done on a short term basis at an Net gearing (x) 0.0 0.0
CFPS (RM) 0.3 0.3
extremely high interest rate of more than 20%, ii) issuance of subordinated loans
ROA (%) 1.7 1.8
to shareholders. However, the option is viable only if all 3 parties willing to put in ROE (%) 3.0 3.2
additional capital, iii) selling Acibadem’s non-core assets and, and iv) holding back NTA/Share (RM) 1.6 1.7
its expansion plans (Acibadem Kartal and Acibadem Atasehir). Considering the Price/NTA (x) 3.2 3.1

debt profile where Acibadem’s short term debts amounted to USD80mn, out of
Share Performance
total debts of US680mn, coupled with its revenue receipts of USD40-50 per Price chg (%) IHH FBMKLCI
annum, we do not believe Acibadem is in a serious financial crisis that would give 1 mth (5.6) (0.9)
rise to cash flow problem. 3 mth (13.5) 6.4
6 mth (11.9) (1.1)
12 mth (9.1) 2.0
Volatility in India Market (Current Operations and Fortis)
In India, in-patient traffic volumes declined by 4.9% QoQ and 5.5% YoY in 2Q18. (12-Mth) Share Price relative to the FBMKLCI
Management attributed the decline to the movement of surgeons and a slight
drop in bread and butter cases across the industry.

We believe Indian operations will remain challenging over the short term due to:
i) escalating regulatory risk ahead of general election in India. According to India’s
newspapers, Modi’s government had cited a need to rationalize hospital treatment
costs after it found they were raising other charges to compensate for losses
faced due to government-set medical device prices and ii) weakening of Indian
Rupee against Ringgit (-10.9% YTD). Source: Bloomberg

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As far as Fortis acquisition is concerned, we continue to think the contribution is
insignificant in the near term after meeting with the management. We continue
to believe that synergistic benefits in terms of revenue enhancement and potential
cost saving (circa 2-4%) post the transaction as compared to the current financing
cost of Fortis Healthcare. Currently, the deal is pending regulatory approval from
Competition Commission of India, which management expects to close by 4Q18
(see IHH report dated 16th July 2018).

Acquired Amanjaya Specialist Centre

This week, IHH announced the acquisition of Amanjaya Specialist Centre situated
in Sungai Petani for RM101.7mn. Based on the hospital’s total bed capacity of 98
units, the acquisition cost represents approximately RM1mn/bed, which is
considered fair. Management guided that the centre is expected to provide
synergies to IHH’s Pantai Sungai Petani (118 beds) which is operating at near
maximum capacity. The acquisition will help to improve IHH’s Pantai Sungai
Petani, which is relatively weak in segments like oncology. In terms of room rates
per night, we note that the rates are almost similar to one another.

Impact
We cut our FY18/FY19/FY20 earnings by -17.1%/-23.5%/-29.5% after adjusting our
finance cost higher. We also adjust our Lira/RM assumptions to 0.70 (from 1.0
previously).

Valuation & Recommendation

YTD’s share price declined by 11.8%. However we maintain our Hold call with a
lower TP of RM5.60/share (from RM6.03/share) based on SOTP valuation mainly
due to the ongoing uncertainties in Turkey and tougher India market outlook.

Table 1: SOTP Valuation

Method Multiple Va lue (mn') Sta ke
S ing a pore E V /E B ITDA 22.0 25,345. 5 100%
Ma la y s ia E V /E B ITDA 20.0 10,479. 9 100%
Turkey E V /E B ITDA 18.0 7,006.7 60%
Interna tiona l E V /E B ITDA 25.0 417.0 na
P Life R E IT F a ir va lue 1,907.8 36 %
IMU Hea lth P /E 15 961.8 100 %
Tota l equity va lue 46,118. 7

S ha res outs ta nding (mn') 8,244.6

TP R M5.60

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 4-Oct-18

Earnings Summary
P&L Balance Sheet
FYE Dec 31 (RMmn) FY16 FY17 FY18F FY19F FY20F FYE Dec 31 (RMmn) FY16 FY17 FY18F FY19F FY20F
Revenue 10,021.9 11,142.6 11,670.9 11,744.2 12,503.4 Fixed assets 16,173.6 16,251.6 16,401.9 16,567.0 16,751.4
EBITDA 2,283.2 2,260.9 2,443.1 2,545.9 2,768.2 Associates + Subs. + JVs 160.8 161.6 163.9 166.3 168.8
Dep. and amor. 799.9 978.1 920.7 930.3 952.2 Goodwill 11,076.0 10,692.2 10,692.2 10,692.2 10,692.2
EBIT 1,389.0 1,804.8 1,522.4 1,615.5 1,816.0 Others 5,178.6 3,675.4 3,693.9 3,650.8 3,595.7
Net finance cost -528.1 -642.5 -836.0 -877.0 -892.6 LT assets 32,589.1 30,780.8 30,951.8 31,076.2 31,208.1
Associates & JV 16.7 2.1 2.3 2.4 2.5
PBT 877.6 1,164.5 688.6 740.9 925.9 Inventories 252.6 281.9 265.2 266.9 277.9
Income tax expense -269.6 -334.6 -192.8 -207.5 -259.3 Trade receivables 1,441.7 1,489.6 666.9 671.1 666.8
MI 4.4 140.1 167.3 193.6 211.7 Cash 2,443.2 6,078.6 6,963.4 7,224.6 6,754.9
Net profit (-MI) 612.4 970.0 663.1 727.1 878.3 Others 461.4 293.3 293.3 293.3 293.3
Core net profit (-MI) 866.0 595.3 663.1 727.1 878.3 Current assets 4,598.9 8,143.4 8,188.9 8,455.9 7,992.9

EPS (sen) 7.4 11.8 8.0 8.8 10.7 Total assets 37,188.0 38,924.2 39,140.7 39,532.1 39,201.0
DPS (sen) 3.0 3.0 2.0 2.2 2.7
LT borrowings 6,852.8 6,103.8 6,674.1 6,687.9 6,697.5
Ratios Trade payables 1,666.6 1,814.2 778.1 782.9 625.2
P&L FY16 FY17 FY18F FY19F FY20F Others 2,800.1 2,874.7 1,838.6 1,843.5 1,685.7
Valuations LT liabilities 9,652.9 8,978.5 8,512.7 8,531.4 8,383.2
PER (x) 49.5 72.0 64.6 58.9 48.8
PBV (x) 1.9 2.0 1.9 21.9 20.1 ST borrowings 634.3 690.1 741.6 743.1 744.2
EV/EBITDA (x) 25.4 20.0 22.8 21.9 20.1 Trade payables 2,612.4 2,811.5 3,112.2 3,131.8 2,500.7
Dividend yield (%) 0.6 0.6 0.4 0.4 0.5 Others 395.1 543.4 543.4 543.4 543.4
Current liabilities 3,641.9 4,045.0 4,397.2 4,418.3 3,788.3
Profitability ratios
ROAE (%) 3.9 2.7 3.0 3.2 3.8 Share capital 8,231.7 8,239.6 8,239.6 8,239.6 8,239.6
ROAA (%) 2.4 1.6 1.7 1.8 2.2 Reserves 13,754.0 13,650.6 14,147.9 14,693.2 15,351.9
EBITDA margin (%) 22.8 20.3 20.9 21.7 22.1 Others 0.0 2,158.7 2,158.7 2,158.7 2,158.7
PBT margin (%) 8.8 10.5 5.9 6.3 7.4 MI 1,907.4 1,851.9 1,684.6 1,491.0 1,279.3
PAT margin (%) 6.1 8.7 5.7 6.2 7.0
Core PAT margin (%) 8.6 5.3 5.7 6.2 7.0 Total liabilities and equity 37,188.0 38,924.2 39,140.7 39,532.1 39,201.0

Liquidity ratios Cash Flow

Current ratio (x) 1.3 2.0 1.9 1.9 2.1 YE Dec 31 (RMmn) FY16 FY17 FY18F FY19F FY20F
Quick ratio (x) 1.2 1.9 1.8 1.9 2.0 PBT 877.6 1,164.5 688.6 740.9 925.9
Depreciation and amortisation 799.9 978.1 920.7 930.3 952.2
Leverage ratios Net interest 528.1 642.5 836.0 877.0 892.6
Total liabilities/equity (x) 0.6 0.5 0.5 0.5 0.5 Other non-cash -985.9 -475.3 -2.3 -2.4 -2.5
Net debt/equity (x) 0.2 0.0 0.0 0.0 0.0 Changes in WC 918.0 224.7 40.2 17.5 -794.5
Tax paid -203.9 -273.7 -192.8 -207.5 -259.3
Growth ratios Operational cash flow 1,933.8 2,260.7 2,290.5 2,355.9 1,714.4
Sales (%) 18.5 11.2 4.7 0.6 6.5
EBITDA (%) 6.6 -1.0 8.1 4.2 8.7 Capex -2,083.9 -1,432.7 -1,013.8 -1,039.3 -1,070.7
Pretax (%) -27.9 32.7 -40.9 7.6 25.0 Interest received 70.1 67.2 202.2 227.0 223.7
Core net profit (%) -3.7 -31.3 11.4 9.7 20.8 Others 342.4 1,266.8 -12.0 -12.0 -12.0
Investing cash flow -1,671.4 -98.6 -823.6 -824.3 -859.0

Net share issue 1.9 3.4 0.0 0.0 0.0

Net change in debts 421.2 -643.6 621.8 15.3 10.7
Interest paid -284.4 -391.7 -1,038.2 -1,104.0 -1,116.3
Others #REF! 2,587.7 -165.8 -181.8 -219.6
Financial cash flow 161.7 1,555.8 -582.1 -1,270.5 -1,325.1

Net cash flow 424.1 3,717.8 884.8 261.2 -469.7

Opening cash flow 1,977.9 2,443.2 6,078.6 6,963.4 7,224.6
Forex 41.1 -82.4 0.0 0.0 0.0
Closing cash flow 2,443.2 6,078.6 6,963.4 7,224.6 6,754.9

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(TH I S P A GE IS IN TE N TI ON AL L Y L E F T B L AN K )

Stock Recommendation Guideline

BUY : Total return within the next 12 months exceeds required rate of return by 5%-point.
HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point.
SELL : Total return is lower than the required rate of return.
Not Rated: The company is not under coverage. The report is for information only.
Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Gross dividend is excluded from total return
if dividend discount model valuation is used to avoid double counting.
Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium.

Disclaimer
The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without
notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this
document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein.

As of Thursday, October 04, 2018, the analyst, Tan Kam Meng, who prepared this report, has interest in the following securities covered in this report:
(a) nil

Kaladher Govindan – Head of Research

TA SECURITIES HOLDINGS BERHAD (14948-M)

A Participating Organisation of Bursa Malaysia Securities Berhad
Menara TA One 22 Jalan P. Ramlee 50250 Kuala Lumpur Malaysia Tel: 603 – 2072 1277 Fax: 603 – 2032 5048
www.ta.com.my

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