Friday, 26 October 2012

IHH Healthcare gets ‘reduce’ rating

PETALING JAYA: Nomura Research has initiated coverage on IHH Healthcare Bhd with a “reduce” rating, saying that while it was a strong healthcare franchise, valuations were already priced to perfection.

Nomura has a below-consensus target price of RM2.81 based on a sum of parts valuation. The consensus target price is RM3.39. It closed at RM3.30 yesterday.

Nomura's financial year (FY) to Dec 31, 2013 net profit estimate for IHH is 14% lower than consensus. For FY13, Nomura has forecast a net profit of RM647mil on the back of RM7.23bil in revenue. For FY14, it estimated a higher net profit of RM842mil on the back of revenue of RM8.41bil.

Based on Nomura's FY13 operating profit estimate (adjusted for a 60% stake in its Turkey hospital, Acibadem), IHH share price implies an EV/EBITDA (enterprise value/earnings before interest, taxation, depreciation and amortisation) multiple of 21 times (x), compared with an average 15x for healthcare service providers in emerging markets and 6x to 9x in developed markets.

“While we like IHH's diversified and growing franchise, losses from Mount Elizabeth Novena, the drag from its aggressive expansion and a rich valuation are likely to undermine its share price performance,” said Nomura.

It said at an FY13 price earnings ratio of 41x and EV/EBITDA of 18x, it believed that IHH was expensive.

“In our view, IHH has an attractive franchise that enables it to ride the growth in demand for healthcare in Asia and the Central and Eastern Europe, the Middle East and North Africa (CEEMENA) regions as it expands capacity.

“We estimate IHH's revenue and EBITDA will increase by 19% and 20% per annum, respectively, from 2013 to 2014,” said Nomura.

The Japanese research house was of the opinion that execution risks could undermine the share price amid high expectations IHH was apt to see drags from its aggressive expansion, especially with losses from Mount Elizabeth Novena likely to continue into 2014.

IHH is among the largest private healthcare providers in the world by market capitalisation and has well-known franchises in South-East Asia under Mount Elizabeth, Gleneagles and Pantai and in Turkey, Acibadem.

With an integrated healthcare model ranging from acute care, imaging, labs and education for healthcare professionals, IHH has been able to develop scale advantages to drive cost efficiencies.

“Its size and scale should enable it to invest in leading-edge technologies and attract top medical talents, which in turn should lead to enhanced clinical outcomes. In addition, IHH appears well-positioned to tap into the rising demand for private healthcare services in Asia and CEEMENA,” said Nomura.

However, Nomura pointed out that IHH was also one of the more richly-valued healthcare services groups globally, adding that its rich valuation posed a risk of under-performance for investors, while high street expectations might further undermine the share price performance should earnings disappoint.

“We see the potential for earnings disappointment, especially with losses from the newly-opened Mount Elizabeth Novena Hospital and the drag on margins from the company's capacity expansion in Malaysia and Turkey,” it added.

Parkway Holdings Ltd was taken private in Aug 2010 by Khazanah Nasional Bhd after a bidding war which valued Parkway at S$4.4bil (RM11bil).

At that point, Parkway owned 40% of Pantai Holdings in Malaysia, while Khazanah owned the majority 60%. After the takeover, Parkway was restructured under IHH, which culminated with IHH owning 100% of Pantai Holdings.

In Sept 2010, IHH acquired the remaining 32.5% interest in IMU Health, a healthcare educational institute, for RM110mil, making it a wholly-owned subsidiary. In May 2011, Japan's Mitsui & Co Ltd acquired a 30% stake in IHH for RM3.3bil.

Expanding its reach outside Asia in January this year, IHH acquired a majority 60% stake in Acibadem, the largest private healthcare group in Turkey for US$826mil.

Acibadem owns a network of 13 hospitals and two medical centres in Turkey and one overseas hospital in Macedonia. Since its inception in 1991, Acibadem has become one of the few integrated healthcare franchises in Turkey offering comprehensive acute care medical services coupled with state-of-the-art facilities and equipment.

In Singapore, IHH added a new hospital following the opening of its 333-bed Mount Elizabeth Hospital in July this year. Total cost of the hospital (excluding medical suites) was S$1.3bil (RM3.2bil).

In two years since the takeover of Parkway, IHH has transformed itself into a diversified healthcare group with franchises serving Asia and CEEMENA.

Nomura estimated that Singapore and Malaysia contributed 29% and 28%, respectively, to IHH's group FY13 operating profit, while Turkey contributed 29%.

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