IHH Healthcare - Novena’s EBITDA losses continue to narrow BUY

-  We re-affirm our HOLD recommendation on IHH Healthcare Bhd (IHH) with a higher fair value of RM3.25/share vs. RM3.07/share, based on a sum-of-parts valuation, following an earnings revision.

-  IHH delivered 4QFY12 results with a normalised net profit (excluding EIs) of RM147mil (+44% QoQ, +38% YoY). This took fullyear normalised figure to RM687mil (+56% YoY), exceeding ours and consensus’ estimates.

-  Stripping off the sale of Mount Elizabeth Novena’s medical suites and EIs, normalised earnings grew 7% and EBITDA at 69% on the back of a 73% YoY growth in revenue. EBITDA margin remained flat at 19.7%. Robust growth came from the consolidation of Acibadem as at 24 January 2012, coupled with organic growth from Singapore and Malaysia. This was further supported by a steady inpatient volume growth and additional revenue from Novena, Acibadem Bodrum and Ankara, which opened in FY12.

-  QoQ EBITDA improved tremendously (+99%) due to savings in construction costs as a result of reversal of over-accruals of development cost for Novena’s medical suites sold. Excluding this one-off, EBITDA still grew 81% YoY.

-  The gradual increased in occupancy at Novena will offset any slide effects from the on-going refurbishment of Mount Elizabeth Orchard and Gleneagles. Novena EBITDA losses continued to narrow this quarter given a steady increase in patient volume. Phase 2 of Novena is earmarked to be operational in 2HFY13F.

-  To adjust for the results, we estimate normalised earnings to expand by 6.5% to RM501mil from RM470 (excluding sales of medical suites and EIs). Thereafter, earnings to expand 21% in FY14F and we introduce FY15F earnings at RM736mil (+21%). Turkey and Malaysia will lead the step-up in bed capacity by 40% and 56%, respectively, by FY15F. Novena continues to ramp up operations and grow inpatient volume. Nonetheless, start-up and pre-operating costs of new hospitals will continue to pressure margins.

-  The tender results in relation to the bid for two lands in Hong Kong are expected to be announced by 2Q. Acibadem’s debt of US$250mil has been repaid. This translates into circa US$11mil cost savings.

-  The next phase of growth for IHH is beyond FY15F. The group is currently focused on expanding internationally, particularly, in India and China. Management has indicated there is no dividend this year. However, the group will review this come end-FY13F.

-  The implied EV/EBITDA multiple of 21x FY13F is at a premium of 40% to peers’ average of 15x. Given IHH’s positive growth prospects, we will turn constructive at a lower entry level. We believe the strong franchise value and earnings trajectory has been priced in. Its expansion plan is well-mapped out and it continues to lead in Singapore, Malaysia and Turkey.

Source: AmeSecurities