Brokers' take: Analysts cut target prices but maintain IHH Healthcare ratings

ANALYSTS from CIMB and UOB Kay Hian have reduced their target prices for IHH Healthcare as the firm's third-quarter earnings came in below estimates, with startup losses associated with expansion still the main earnings drag.

CIMB reduced its target price to RM6.36 per share from RM6.99 and kept its "add" rating on the stock, while UOB Kay Hian reduced its target price to S$1.71, down from S$1.73, and maintained its "hold" rating.

As at 10.46am on Tuesday, IHH Healthcare was trading 1.09 per cent lower at S$1.81 apiece.

CIMB noted that the firm's earnings before interest, taxes, depreciation and amortisation (Ebita) was largely eroded by the RM69 million (S$22.6 million) startup costs from Gleneagles HK (GHK), which resulted in a 42.4 per cent drop in core net profit. This figure formed only 47 per cent of their consensus estimates. Similarly, UOB Kay Hian noted that year on year (y-o-y), costs remained high for the firm due to higher depreciation, finance costs and staff costs.

However, IHH continues to record a "double-digit y-o-y improvement in average revenue per inpatient admission for both its Singapore and Malaysia operations, thanks to its strong appeal to foreign patients particularly from Indonesia and Indo-China", CIMB said.

Likewise, UOB added that Singapore and Malaysia have performed well on high intensity cases, with IHH recording a 25 per cent y-o-y increase in revenue from Indonesian patients for the third quarter this year. In Malaysia, the firm's nine-month 2017 revenue also rose by 11.1 per cent from the preceding year.

"This was largely due to the ramp-up of centres of excellence, improvement of clinical outcomes as well as upgrade of equipment and facilities at the hospitals," UOB said.

While GHK, which opened in March this year, is still loss making, CIMB said that its Ebita loss narrowed for the third quarter this year. Therefore, the broker "remains positive on its continual ramp-up in operations (especially more complex procedures) and month-on-month growth in patient load". It expects GHK to reach Ebita breakeven in fiscal 2019.

Looking ahead, IHH remains on track in its China expansion plans, starting with Chengdu, Nanjing and Shanghai in late 2018 to 2020.

"Its 350-bed capacity Chengdu hospital will first open with 80-100 beds and an estimated 40-50 doctors. We expect some pre-opening expenses from H2 FY18 onwards, but do not think that this will be extensive given the 'asset-light' model and 49 per cent ownership," CIMB said.

It added that the firm's recent issuance of US$500 million perpetual bonds is a "sizeable war chest for the group to pursue more aggressive M&As in the near-term". Although potential M&As (mergers and acquisitions) are a key catalyst, CIMB said that downside risk could stem from poor overseas execution.

Similarly, while UOB noted that IHH's near-term earnings may be negatively affected by expansion plans, it remains positive on the long-term prospects of the firm because of growth in China, Hong Kong and India.