GEM Healthcare - IHH Healthcare Berhad reports strong sales, mixed margins in 2015

Executive summary

IHH Berhad reported a good set of results in 2015 statements. The like-for-like growth in most of IHH's operating regions is strong. Margins are somewhat weaker due to capacity investments both at "home" and "international" markets. Range of new hospitals/projects, which became operational last year, are not yet profitable. Singapore, one of the three markets IHH considers home stands out as the most improved region and the only country where the group actually posted wider EBITDA margin (+145bp). The growth and margin gains in Singapore are largely driven by Mount Elizabeth Novena, which continues to benefit from operating leverage as capacity usage grows. Margins came in lower in the other two core markets: -79bp in Malaysia and 32bp in Turkey, which dragged the Group's EBITDA margin, which was down 108bp on our calculation. There were three major investments which became operational in 2015. Gleneagles Kota Kinabalu opened in May 2015, Gleneagles Medini opened in November 2015, Acibadem Taksim Hospital opened in October 2015.

The group is implementing an ambitious growth agenda in Asia and EMEA. Some of these projects across the new regions including those in India, North Asia/China as well as Turkey and Malaysia should become earnings accretive from this year onwards. The group is at the early stages of this expansion plan; the management is so far on track to meet targets. The growth strategy, once executed fully, will transform IHH and place the company on a strong footing in the Continent including the largest markets, namely India and China. It is conceivable IHH will become the largest business in the world in its class of healthcare service providers.

Full year results (15% sales, 10% EBITDA growth)

Full fiscal year revenues and EBITDA grew by 15.1% and 10.4% YoY to RM8.5B and RM2.1B, respectively. Profit before minorities for the year came in at RM933.9M, up 24% driven by non-operational items or one-offs including the reversal in 2015 of a tax provision charged to2014 P&L, tax credit on projects and revaluation surplus on investment properties. IHH Group reported a strong cash position in its balance sheet as at the end of December 2015. The cash and alike stood at RM2.0B. Net gearing increased to 0.19x in December 2015 from 0.08x reported as at December 2014. The change in gearing is due to planned capex and allocation of cash into money market funds.

December quarter (18% sales, 5% EBITDA growth)

IHH reported RM2.3B in December quarter revenues registering 18% growth. EBITDA reads RM614.3M (+5%). Earnings posted 74% YoY growth to RM415.8B on several one-off items/exceptional gains including a revaluation surplus on investment properties, investment tax credit and foreign currency gains on non-Turkish Lira denominated loans. These one-offs more than offset the finance costs arising from acquisitions in India and higher than normal depreciation charges.

December quarter by division

Parkway Pantai (22% sales, 9% EBITDA growth)

Parkway Pantai, the Group’s subsidiary operating mainly in South East Asia and India, posted a 22% sales growth on the year. EBITDA grew 9%. Sales growth is largely driven by continued ramp up of Mount Elizabeth Novena Hospital in Singapore. Mount Elizabeth Novena December quarter revenues indeed grew 36% on the year with its EBITDA jumping 48% benefiting from greater operating leverage. Inpatient admissions at Parkway Pantai’s Singapore hospitals added 6.6% on the year to reach 17,335, driven mainly by local patients. Average revenue per inpatient admission was marginally better (+1%) at RM27,338. Patient traffic in Malaysia was down 3.2% to 45,675. The management is guiding this drop is due to reasons outside their control such as a general slowdown in consumption following a weaker Ringgit and the implementation of a Goods & Services Tax. The good news in Malaysia was the growth in revenue intensity with revenue per inpatient admission increasing 9.7% to RM5,475. It appears the increase in revenue intensity both in Singapore and Malaysia was due to (1) increasing contribution of more complex/value added cases to overall sales and (2) price increases. 

Acibadem Holdings (13% sales, 2% EBITDA growth)

Acibadem reported a 13% year on year growth in revenues to reach RM813.1 million with 2% growth in EBITDA to RM150.0 million. The continued ramp up at Atakent whose EBITDA more than tripled RM10.4M on the year. Inpatient admissions were flat (+0.7%) at 34,372 with revenue intensity growing 8.5% to RM11,092 driven by increasing share of more complex cases and price hike.

IMU Health (8% sales, 68% EBITDA growth)

IMU Health, IHH Berhad's medical education affiliate reported 8% growth in sales at RM60.2M driven by rising tuition fees. EBITDA shut 68% to RM20.0M. The EBITDA growth is due to (1) tuition price hikes, and (2) lower expenses incurred for marketing activities and maintenance.

PLife REIT (29% sales growth, EBITDA down 4%)

PLife REIT, the real estate company which owns and manages a portfolio of 47 healthcare-related properties posted 29% growth in revenues to RM29.5M on improved contribution from the nursing homes acquired in 2015. EBITDA was down by 4% to RM134.9M year on year

A recap of investments by region

India

IHH's capacity in Indian healthcare market is likely to come close to or exceed the Group's presence in Turkey and Malaysia, which IHH classifies as its "home" markets. IHH Group concluded two major acquisitions in India last year: Continental Hospitals and Global Hospitals. IHH acquired 51.0% stake in Continental and 73.4% stake in Global. Continental has 750 licensed beds operating in Hyderabad while Global runs 1,100 bed capacity in other major cities of India. With these investments, IHH has reached a critical 2000-bed business in India. The Group plans to raise Global's capacity to 1,900 within the next five years. We expect most of the additional beds in Global to become operational in 2017/18. IHH has also announced a 450-bed capacity greenfield project under Gleneagles in Mumbai due for completion in 2017. With Global's extension and Gleneagles Mumbai Hospital, IHH's overall bed capacity in India to exceed 3000 mark sooner, probably before 2018. With these acquisitions, IHH Healthcare Group will have presence in 5 out of the 7 major cities of India, namely Mumbai, Bangalore, Chennai, Calcutta, and Hyderabad. The other two mega Indian cities where IHH does not yet have presence are Delhi and Ahmedabad. Majority of IHH's business in broader Indo-China region is thru its affiliate Parkway Pantai Limited. PPL is one of Asia's largest integrated private healthcare service providing groups with a network of 31 hospitals and more than 6,000 licensed beds. PPL operates in Singapore, Malaysia, India, China, Brunei and UAE under “Mount Elizabeth”, “Gleneagles”, “Parkway” and “Pantai” brands. 

Malaysia

IHH Healthcare Berhad is among the leading chains investing in Malaysia. IHH operates in Malaysia through its affiliate Parkway Pantai Limited (“Parkway Pantai”). Parkway Pantai Limited, is in fact one of Asia's largest integrated private healthcare groups with a network of 31 hospitals and more than 6,000 licensed beds in the Continents, including Singapore, Malaysia, India, China, Brunei and United Arab Emirates. In Malaysia, IHH Berhad owns and operates 10 Pantai and 4 Gleneagles hospitals. The Group also runs ancillary healthcare services including Pantai Integrated Rehab and Pantai Premier Pathology across Malaysia. The Group's recent projects in Malaysia includes 100-bed capacity Gleneagles Kuala Lumpur (expansion project completed in 2015), Parkway Pantai (300-bed greenfield, 2017 completion), Pantai Ayer Keroh (160-bed expansion, 2017 completion), Pantai Klang (80-bed expansion, 2018 completion), Pantai Kuala Lumpur (120-bed expansion, 2018), and Gleneagles Medini (310-bed greenfield, 2018). Once these investment are completed, IHH will have more than 1,300 additional beds in Malaysia by 2018. 

Turkey

IHH Group’s greenfield, brownfield and expansion investments continued throughout 2015. Acibadem Holdings, IHH Group's affiliate in Turkey, added sizeable capacity in Istanbul and Western Anatolia. The group has undertaken major projects on both sides of Istanbul including a comprehensive university hospital. These investments were funded entirely by Acibadem Holdings. IHH management is guiding patient volumes in Turkey to grow as new capacity comes on stream. Bodrum and Atakent Hospitals will continue to ramp up their operations. The construction of cancer care center at Bodrum and the expansion of Sistina Skopje Hospital in Macedonia are now complete. Zekeriyakoy Medical Centre commenced operations in April 2015 and is predominantly used as a referral center to Maslak. Taksim Hospital, a brownfield project, also commenced operations last year.

China

IHH Berhad has become more active investing in both Mainland China and Hong Kong. Parkway Pantai has announced two major investment projects, one in the Mainland and another in Hong Kong. Parkway health Chengdu in China hospital is projected to start operations in 2017. This is a 350-bed capacity hospital. Gleneagles Hong Kong where IHH has contributed 60% equity is a 500-bed capacity hospital in Hong Kong due for completion in 2017. The Gleneagles Hong Kong is projected to cost RM 1,809M (circa $413M).

Myanmar

The government in Myanmar is actively promoting private sector investments in healthcare. Following the steps taken by the government to attract foreign investments, IHH Group has announced a major greenfield project in Myanmar. The 250-bed capacity Parkway Yangon hospital project in Yangon is expected to cost $70M. The project will be overseen and managed thru Parkway Healthcare Indo-China, IHH's wholly-owned affiliate in the region and operated by a joint venture consortium of 4 companies led by Parkway (52.0% stake). Physicians from Mount Elizabeth Hospital, one of the major hospitals in Parkway Pantai network, are expected to help start the operation in the new hospital and actively engage with specialists in Myanmar and outreach to the broader population through disease prevention and health promotion activities. The hospital is Parkway's and hence IHH Group's first in Myanmar. Yangon facility should add approximately 3% to IHH Group's overall bed capacity.