Analysts neutral on IHH’s performance

KUCHING: Analysts are on the sidelines for now with IHH Healthcare Bhd (IHH), given that the group’s near-term earnings could be dampened by losses from the opening of new hospitals and hiccups from consolidation of newly-acquired entities.

According to Affin Hwang Investment Bank Bhd (Affin Hwang), in Singapore, IHH hospitals’ inpatient admissions continue to see higher market share as Singapore public hospital occupancy rates remain above 80 per cent.

Affin Hwang expected an average seven to eight per cent growth in inpatient admissions and higher revenue intensity to deliver teens growth in sales for 2017 and 2018.

The research firm noted that IHH’s Singapore earnings before interest, tax, depreciation and amortisation (EBITDA) margin is likely to improve as Mount Elizabeth Novena (MEN) becomes more mature.

It further noted that IHH’s Malaysia hospitals’ first nine months of 2016 (9M16) inpatient admissions grew by six per cent year on year (y-o-y).

“We expect its inpatient admission numbers to continue to do well for next two years on the back of a private healthcare spending recovery and brownfield expansion,” the research firm said.

“Pricing adjustment and the narrowing of start-up losses at new hospitals should be long-awaited catalysts and lead to margin improvement in 2017 after three years of EBITDA margin declines.”

Affin Hwang highlighted that in the third quarter of 2016 (3Q16), Acibadem’s weak EBITDA margin was attributable to lower foreign-patient admissions, a lower margin profile from its Bulgaria operations, and higher operating costs arising from higher minimum wages and the weaker Turkish Lira.

“To note, four Bulgaria hospitals that Acibadem acquired recently have a lower average revenue intensity of RM5,800, versus those in Turkey of RM10,000, as well as a lower profit margin,” Affin Hwang said.

The research firm expected these factors to continue to weigh on Acibadem’s operations in 2017.

As for the opening of the 500-bed Gleneagles Hong Kong (GHK), Affin Hwang noted that it is slated to open by end 1Q17.

Although Affin Hwang believed it will be another medium-term growth driver for IHH, in the near term the research firm expected higher start up-losses caused by the opening of 500 beds all at once, leading to higher operating costs.

Overll, Affin Hwang noted that near-term headwinds such as Turkey geopolitical risk, GHK start-up losses, and realignment of the Bulgaria operations may offset the positives of the Malaysia and Singapore operations.

However, the research firm continued to see valuation as being unattractive.

Hence, Affin Hwang maintained its ‘hold’ call.

“As the company is still expanding aggressively, acquisitions and greenfield expansion will likely lead to muted financial performance in coming quarters,” the research firm said.