PETALING JAYA: The opening of the Gleneagles Hong Kong hospital by the end of March should be a strong earnings growth catalyst for IHH Healthcare Bhd , whose earnings took a hit in the financial year ended Dec 31, 2016 largely due to unrealised foreign exchange losses.
RHB Research Institute explained that the tight supply of private healthcare, strong private healthcare insurance demand and higher healthcare costs in Hong Kong compared to Singapore and Malaysia would drive this growth catalyst.
“IHH has demonstrated a solid track record in sustaining its earnings before interest, taxes, depreciation and amortisation (ebitda) margins while still ramping up its new hospital assets,” the research house noted.
It has upgraded the stock to a “buy” from “neutral” and raised the sum of parts-based target price to RM7.30 from RM7 with a 22% upside potential.
It said IHH currently trades at 16 times financial year ending Dec 31, 2018 forecasted (FY18F) enterprise value to ebitda, with undemanding valuations for a 23% two-year ebitda compounded annual growth rate (CAGR).
“We forecast ebitda margins to recover by 1.8 percentage points in FY17, despite assuming start-up losses from new hospitals – we expect other maturing hospital assets in IHH’s portfolio to offset the shortfall.
“We also expect IHH to generate a two-year (FY16-18F) ebitda CAGR of 23%,” it said.
It lifted earnings expectations on the stock and adjusted its FY17F to FY18F ebitda 2% to 4% higher to take into account of a stronger Singapore dollar to ringgit exchange rate, resilient inpatient admissions and revenue intensity growth across IHH’s core markets in Malaysia, Singapore and Turkey.
The higher earnings expectations were also due to positive ebitda contributions from Gleneagles Hong Kong from FY18F.
“Our ebitda forecasts are 5% to 7% higher in FY17 to FY18 compared to consensus, as we have assumed a faster ebitda breakeven for Gleneagles Hong Kong, cost efficiency and margin accretion from maturing hospital assets,” RHB Research said.
It also said IHH’s shares have underperformed the market by some 12% in the year-to-date period.
The research house said it remains positive on IHH’s strong earnings growth outlook.
“We raise our discounted cash flow / sum of parts based target price to RM7.30, valuing the stock at 23 times and 18 times FY17F/FY18F EV/EBITDA respectively, in line with its peer sector average,” it said.
“While we expect IHH’s quarterly earnings in the first half of 2017 to be bumpy in view of startup losses from Gleneagles Hong Kong, we believe earnings accretion should start coming through in the second half of 2017 as operations start ramping up,” RHB Research added.