IHH(Q0F): Health and Wealth?

IHH(Q0F): Health and Wealth?

This column is jointly written by @fayewang@calvinwee and @gordon_ong
-Faye is both a fundamental analyst and economist by nature. She is a global thinker who’s open-minded and enjoys learning from the market.
-Calvin is a fundamental analyst at heart and an ardent disciple of value investing. He relishes the process of searching for undervalued stocks and enjoys collecting dividends from his stocks.
-Gordon has a demonstrable interest in equity investments, financial markets, and negotiating deals. As @NTUInvestmentClub president, he has an understanding of what factors drive an organisation’s success.

Brief Background: 
IHH Healthcare Berhad (IHH) operates an integrated healthcare business and related services and has leading market positions in its home markets of Singapore, Malaysia and Turkey. IHH is the world’s second largest healthcare operator by market capitalization. It is listed on both Bursa Malaysia and SGX since 2012.
IHH operates through four segments:
* Parkway Pantai, one of Asia’s largest private healthcare providers with a network of hospitals, medical centres and clinics, and ancillary healthcare businesses in predominantly in Singapore and Malaysia.
* Acibadem Holdings, an integrated private healthcare and diagnostics provider with an extensive network across Turkey and a leading player in the Turkish private healthcare sector
* IMU Health, Malaysia’s first private healthcare university to offer local and foreign programmes
* ParkwayLife REIT, which is a real estate investment trust, and others segment, which includes the corporate office. Its business units operate over 10,000 licensed beds in approximately 50 hospitals, as well as medical centers, clinics and ancillary healthcare businesses in over 10 countries.

Recent news: 
May 23, ‘IHH facing wrath of volatile Turkish lira’, refer to the news at: http://www.thestar.com.my/business/busines…
May 22, ‘IHH Healthcare expects to maintain its edge, sees challenging year’ refer to the news at: http://www.thestar.com.my/business/busines…
May 22, IHH Healthcare Berhad annual report of financial year 2016, refer to the report at: http://www.ihhhealthcare.com/investor-rela…
March 17, ‘3 Things Investors Should Know from IHH Healthcare Bhd’s Latest 2016 Results’, refer to the news at: https://www.fool.sg/2017/03/17/3-things-in…
February 23, ‘IHH Healthcare in the red for Q4’, refer to the news at http://www.businesstimes.com.sg/companies-…

Performance Summary: 
Amidst weak economic conditions, IHH registered 19% growth in revenue yoy and 7% growth in EBITDA. Revenue growth came from both organic growth of its existing operations and inorganic growth from its acquisitions of Continental Hospitals, Global Hospitals, Tokuda Group and City Clinics. As result, EBIDTA grew on the back of the strong growth and recognising a lower revaluation gain of RM8.5 million from ParkwayLife REIT’s investment properties, However, it is important to note that its PATMI declined 4% due to due to incremental depreciation from new hospitals and higher net financing costs. Moving forward, with new hospitals opening in China and India, it will be interesting to observe if PATMI margins will continue to decline.

Upsides: TL rebound against SGD, IHH successfully reduces currency exposure, acceleration of Turkey’s shift towards private healthcare, unexpected growth in affluence within Asia.
Downsides: Competitive pressure continue to squeeze margins, interest rate risk, continued TL weakness, rising wage pressures

Operating performance

IHH’s revenue growth has increased steadily since 2012 at a CAGR of 7.56%, driven mainly by the rise in admissions. COGS growth is on par with revenue at a CAGR of 6.67%. However, SG&A has increased at a CAGR of 15% due to higher staff costs, while other operating expense increased at CAGR of 20%, eroding margins. Its profits momentarily dipped in FY16 due to start-up losses of RM2.3m from its new hospitals in Malaysia as well as pre-opening expenses of RM19.7m incurred for its coming Gleneagles Hong Kong. Moreover, for Q1 results, after reversing the 101.5m gain on sale of asset, net income fell by 33.6% q-o-q (due to higher significantly higher inventory costs).

Segment performance

In 1Q17, overall revenue growth was driven by increase in inpatient admissions volume, as well as revenue per admission. On most key geographical regions, IHH is capturing more inpatient volumes while improving service mix to capture more revenue per volume. Aberration for TRY is due to depreciation of Turkish Lira against SGD.

From a business segment perspective, Acibadem and Parkway Pantai dominate within IHH Group. While Acibadem’s operational dominance within Turkey and its continued organic growth of patient admissions are reflected in the increased revenue, Acibadem’s profitability is affected by higher inventory costs, staff costs and rental costs, coupled with the continuous depreciation of Turkish Lira against SGD.

Financial & Cash Position

IHH has strong and improving OCF, growing at a CAGR of 7.5% since 2012. On an overall perspective, its expansion plans and CAPEX seem to be slowly tapering off with the completion of Medini, Kota Kinabalu, Taksim, and Gleneagles HK. However, due to the lumpy nature of CAPEX investments and increase in WC, FCFE is temporarily growing increasingly
negative in 1Q17. This is expected to smoothen out for FY17. IHH has sufficient cash reserves and sufficiently positive net change in CCE that we do not foresee financing issues for their growth.

Stock Information

IHH’s D/E is rising but is still at a healthy 35.3%, hence it can raise additional financing for future expansion plans. On the other hand, IHH’s ROE and ROA is lingering at around 2.5% due to its lower margins, as well as some of the assets not being in full operations yet. DPS is
forecasted to remain at 0.01, while payout ratio will fluctuate based on EPS for the year.

Peer Comparisons
Parkway Pantai Limited (PPL) and Acibadem Hospitals Group are two largest segments of IHH, they comprise 95% of IHH’s total revenue. Given private healthcare is the main business of both segments, we choose Raffles Medical Group Ltd and Health Management International Limited (HMI) as the peer companies.
The principal activities of Raffles medical are the operation of medical clinics and other general medical services, and HMI is a healthcare provider with presence in Singapore, Malaysia and Indonesia. Among the three companies, IHH is at an advantageous position regarding operational scale and international brand awareness.

Profit Margin

As demonstrated in the chart, Raffles medical is the one with highest net profit margin among three companies. IHH is the company that generated highest revenue and net profit, however, its net profit margin was similar with that of HMI in 2016. It is worth noting that all of the three companies experienced decline of net profit margin in 2016. According to the last-twelve-month data, IHH’s performance is rallying, while HMI still suffer from dropping profit margin and Raffles medical reaches an intact stage.

Cash position


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