By Lawrence Yong
Higher finance costs and start-up losses of new hospitals could put a drag on the share price of Asia’s largest private hospital operator IHH Healthcare Bhd as it strives to expand in the next few years, analysts said.
This prompted bank-backed research notes issued Monday to call for investors to ‘hold’ or ‘sell’ IHH shares despite the group’s report of higher earnings for 1Q13.
IHH, which operates the Pantai and Gleneagles chain of hospitals in Singapore and Malaysia and Turkey’s Acibadem said that its recurring net profits rose 9% to RM133.5 million in the first quarter of 2013, over the same period last year. For the same quarter, revenue grew 29% year-on-year (y-o-y), partly due to a new accounting measure of its associated hospitals and a higher patient load.
However, most analysts consider the company’s stocks, which have ran up over 22% since its public offering mid last year, fairly valued. IHH shares traded at RM3.92 on Monday on Bursa Malaysia, down 0.76%.
“IHH remains one of the best proxies to the growing healthcare industry in the region, though valuations are unattractive at the moment,” Maybank IB research noted. IHH was the world’s third biggest initial public offering (IPO) after Facebook and FGV Holdings last year when it raised US$2.1 billion (RM6.3 billion). The company has a market capital of RM32 billion.
Most analysts have cut IHH’s earnings forecast as they rolled forward their valuation of the company to FY14-15. Alliance research said that it had cut FY13-FY14 core earnings forecasts by 9.6% to 16.0%. Public Investment Bank Research (PIVB) also cut their net profit forecast for FY13 to FY15 by 8.1% to 8.6%.
Maybank IB analysts were more positive on IHH. The bank said they expect it to chalk up 30% compounded annual growth rate (CAGR) to FY15, but noted that management had warned of cost pressure, mostly in the form of wages, which could trim operating margins.
IHH key hospitals in Singapore, Malaysia and Turkey served more patients in 1Q13. Malaysia saw a 2% y-o-y growth in inpatient admission numbers without additional hospitals, while Singapore admission numbers grew 8% y-o-y, as its Novena Hospital ramped up operations, analysts noted.
“With Mount Elizabeth Novena anticipated to break even this year and standing at 35% occupancy, this should further catalyse the stock. The planned ramp up of full capacity of 330 beds is likely to only materialise next year,” Am Research noted.
Singapore hospitals also posted higher revenue intensity, after undertaking more complex cases.
PIVB research noted that of the three hospital chains, its Turkey operations fared the worst. Its margins for 1Q13 fell 8% to RM124.5 million despite reporting higher patient volume. This may be due to higher initial start-up costs of the Bodrum and Ankara Hospitals, PIVB said.
Analysts said the group’s revenue should grow in FY13 underpinned by hospital capacity expansion in all three countries, which contributed near equal share to the company’s coffers in FY12.
In Singapore, Mount Elizabeth Novena Hospital is expected to start its second phase later this year. In Malaysia, IHH has expanded Gleneagles Medical Centre in Penang, touted as the state’s first private hospital. In Turkey, ongoing expansion projects are planned for Acibadem Bodrum Hospital, Acibadem Sistina Hospital and Acibadem Avanos Medical Centre. A new 270-bed hospital, Acibadem Halkali Hospital, is also expected to be operational by 4Q13, analysts said.
Looking ahead, a new growth frontier for the group would be Hong Kong, where it recently won sites for a new hospital. The company is slated to invest HK$5 billion (RM2 billion) to build a new hospital in Wong Chuk Hang on Hong Kong Island, which may start in 2016.
“This acts as a platform to penetrate deeper into the large and underserved market of Hong Kong,” PIVB analyst said. IHH is also looking to further penetrate into India and China.
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