• 9M FY17 Revenue met 72% of our FY17 full year forecast of RM449.2 mn
• 9M FY17 PATMI met 32% of our FY17 full year forecast of RM30.8 mn; excluding one-offs, it would have met 70% of our FY17 full year forecast
• Completed consolidation of ownership of its two hospitals in March 2017; impact on PATMI will only price in 4Q FY17
• Growth drivers remain intact: 14% additional bed capacity by 1H FY18; Construction of new hospital extension block in Regency by end-FY20

Growth drivers remain intact; Expansion pipeline on track

• Higher patient load in 3Q FY17 (+1.4% yoy) for both hospitals, i.e. Mahkota Medical Centre (“Mahkota”) and Regency Specialist Hospital (“Regency”).
• Higher average bill size in 3Q FY17. Both average bill sizes for inpatient and outpatient grew at +5.9% yoy and +6.9% yoy respectively.

We expect both hospitals to continue to grow patient volume and average bill sizes with: (i) 14% additional new bed capacity by 1H FY18; (ii) new hospital extension block at Regency which will more than double Regency’s capacity by end-FY20.

Sustainable gross margin; Consolidation to improve EBITDA margin

We maintained our FY17F gross margin at c.33% despite a higher staff costs in 3Q FY17. We expect the Group to continue its recruitment drive in the coming two quarters in tandem with the new wards opening in MMC and RSH.

However, the higher staff costs will be offset by increased revenue intensity as HMI expands its range of specialist healthcare offerings, improve its facilities and infrastructure. In addition, the consolidation in the ownership of both MMC and RSH to 100% would increase scale, enable HMI to further optimise operating leverage, better management of cost pressures, such as rental, purchasing cost and staff cost.

Fundamentals remain strong; Reiterate “Buy”

The consolidation transaction was completed on 27^th March 2017 with debt drawdown of SGD53 mn (c.RM168mn), which turned HMI into a net debt position of RM89.9mn in end 3Q FY17. Nonetheless, financial position remained healthy with cash position of RM120.9 mn, net debt to T12M EBITDA of 1.0x, and gearing ratio of 0.6x as at 31 March 2017.

We think that the RM120.9mn cash position, coupled with a strong cash flow generated from its operating activities (c.RM20 mn per quarter), will enable the Group to achieve its target to par down half of the consolidation debt by end-2017 (end-1H FY18). The next major capital expenditure will be the construction cost for the new hospital extension block at Regency which is estimated to be c.RM160 mn, and will be funded by internal cash resources and bank loans.

Maintained “Buy” rating with DCF-based TP of $0.83

We adjusted our FY17F assumptions to include the one-off consolidation costs and higher income tax expenses. Including the one-off consolidation costs, we expect the full year PATMI to come in at RM23.8mn (22.7% lower than our previous forecast).

Note that earnings from both hospitals will be fully attributable to equity holders starting from 4Q FY17. We expect 4Q FY17 core PATMI to contribute RM12.9 mn, bringing the full year core PATMI to RM34.5 mn, which 12% higher than our previous forecast.

We remain cognisant of:

• Foreign exchange movement: SGD against the functional currency of the Group, MYR. Weakening MYR against SGD would increase its price competitiveness for medical tourists to its hospitals but would depress the SGD-denominated stock price.
• Festive season in 4Q FY17: Ramadan will impact one full month in 4Q FY17, as compared to 3 weeks in 4Q FY16

Our target price is an implied 35x FY18F PER.

Ringgit weakened at an accelerated pace over the past two quarters, dampened consumer sentiment; local patients were in cautious spending mode

Patient mix in 3Q FY17 remains unchanged with 21% of total patient load being foreign patients. However, there is a shift in type of services local patients obtained – more outpatient services than inpatient services.

Nonetheless, we think consumer sentiment should improve as Ringgit strengthened slightly since March 2017

Figure 1: