SINGAPORE (Sept 5): Have IHH Healthcare’s well-intentioned efforts to diversify its portfolio of hospitals into highly populous emerging markets with a highly visible pipeline of growth finally started to bear fruits?

In 2Q19 ended June, Asia’s largest hospital operator reported earnings of RM185 million ($61 million), up 12% from a year ago as revenue jumped 37% to RM3.65 billion.

See: IHH 2Q earnings up 12% as revenue expands on new buys, hospital rampups

Overall, Singapore posted a solid performance, recording a topline growth of 12% y-o-y. This was backed by revenue intensity and higher inpatient volume. Higher foreign patients were a notable contributing factor.

Meanwhile, total revenue from Malaysia surged 17%, thanks to recognition of Amanjaya which was acquired last Oct and the relatively soft ringgit which attracted foreign patients.

Against high fixed operating leverage, Singapore and Malaysia saw EBITDA earnings grow 28% and 29% y-o-y respectively.

However, IHH experienced minor hiccups in its Hong Kong, Turkey and India operations, as all three markets reported negative q-o-q EBITDA figures.

EBITDA from Gleneagles HK (GHK) EBITDA fell to RM42 million from RM40 million the previous quarter in tandem with a 6% fall in occupancy rates due to a seasonal low in operations. While the hospital had initially targeted medical tourists from Mainland China to accelerate gestation, these efforts were hindered by the protests in the city.

In Turkey, IHH’s Acibadem hospitals also registered softer-than-expected topline growth of 13% for the quarter as overall patient volumes plunged as medical inflation surged 30% y-o-y.

Operations in India too were not spared. Although earnings from Fortis Healthcare improved 14% q-o-q to RM83 million due to cost-saving initiatives, IHH's India operations were hit with a doubling of EBITDA losses of RM8 million from a year ago. 

In its outlook statement for 2Q19, IHH’s management said it may consolidate its multi-country portfolio strategy to diversify its earnings base in cash flow-generative markets such as Singapore and Malaysia, medium-term growth momentum from Turkey, and long-term growth opportunities from India and Greater China, besides focusing on ramping up existing operations and integrating Fortis in the medium to long term.

In a Sept 3 report, UOB Kay Hian said IHH’s 2Q19 results met its consensus forecast but were below its expectations.

“We underestimated the turnaround of operations in frontier markets and finance cost,” says UOB’s Malaysia Research Team.

Nevertheless, UOB says IHH still offers a highly visible pipeline of growth ahead, thanks to the gradual turnaround of frontier operations.

“[Our] lofty valuations are well justified by a highly resilient, defensive and attractive 3-year earnings CAGR of 16.0%, and IHH’s sound track record beginning to pay off through increasingly mature but relatively new greenfield hospitals (GHK and Altunizade Hospital),” says UOB’s Malaysia Research Team.

For GHK, UOB said the protests in Hong Kong could lead to a pickup in insurance patients and higher demand for fixed price packages. 

In China, IHH’s two new hospitals are well on track for opening, with Gleneagles Chengdu and Gleneagles Shanghai slated to begin business in 4Q19 and 4Q20 respectively.

UOB is maintaining its ‘buy’ with an adjusted target price of RM6.50 or 38.1 times FY20F earnings.

On the contrary, Maybank Kim Eng has downgraded IHH to “hold” from “buy” as it is mindful of the risks that could hit its earnings estimates and price target.

In a Sept 2 report, Maybank analyst Lee Yen Ling said abrupt adverse changes in the economy and insurance policies may lead to lower earnings for IHH.

Additionally, sharp appreciation of MYR against SGD/TRY/ INR/HKD/CNY will also affect its earnings, for a bulk of the group’s earnings is derived from overseas markets.

“There is also regulatory risk coming from potential new pharmaceutical price controls in Malaysia, India and China,” says Lee.

As at 4.17pm, IHH Healthcare shares in Singapore are trading 2 cents lower at $1.85 or 34 times FY20F earnings, according to UOB valuations.