Brokers' take

Health Management International | Add Target price: S$0.79 Aug 29 close: S$0.615 CGS-CIMB, Aug 28

Health Management International (HMI) reported Q4 FY2018 core Patmi (profit after tax and minority interests) of RM15.9 million (S$5.28 million), up 51.5 per cent year on year and 2.9 per cent quarter on quarter despite seasonality weakness.

Its FY2018 core Patmi of RM62.8 million was 7 per cent above our/consensus full-year forecasts due to better margins; excluding the minority interests' consolidation last year, FY2018 core net profit grew 15.9 per cent yoy, on the back of 7.3 per cent topline growth and 2.4 percentage points of Ebitda (earnings before interest, taxes, depreciation and amortisation) margin expansion.

Distribution and marketing expenses were 65 per cent higher due to the rebranding exercise, and should stabilise even with StarMed opening. HMI's 62.5 per cent owned StarMed has received the relevant Ministry of Health licences and will commence operations in FY 2019. Spanning four levels, it will not only boast of specialist outpatient and day surgery centres, but also a full range of radiology and diagnostic equipment. Management expects a gestation period of up to 2-3 years, though startup losses would be less hefty given the format of the ambulatory care centre. We forecast RM3 million - 7 million Ebitda loss per annum in its first three years of operations.

Notwithstanding slower inpatient load growth and the trend towards shorter hospital stays, HMI continues to invest in future growth. Plans to diversify marketing efforts to other South-east Asian countries are also in the pipeline.

Japan Foods | Buy Target price: S$0.58 Aug 28 close (last traded): S$0.49 RHB Research, Aug 29

We maintain a 'buy' rating with a target price of S$0.58, with a 19 per cent upside. The stock is trading at a discount relative to peers, which is unjustified, given its industry-leading yields, high gross profit margin and stable growth prospects from the launch of new franchise brands. We visited Japan Foods' new ramen franchise restaurant Konjiki Hototogisu and came back positive about the brand's potential for generating higher revenue per restaurant.

We are also upbeat on the likelihood of it delivering net margins similar to other key brands. While this alleviates our concerns about its lower GPM (gross profit margin), we do not expect the brand to make material revenue contributions amid limitations on growth in the number of new restaurants.

We believe the premium nature of the franchise brand, higher pricing and material costs along with need for suitable (low rental cost) locations imply the growth of the Konjiki Hototogisu restaurant network is limited.

Key risks to our rating are rising labour costs and rental expenses, lower consumer spending and the non-renewal of franchise agreements.

Compiled by Wong Kai Yi

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