• 1Q19 Revenue and Core PATMI missed our estimates by -6.9% and -19.9% respectively. This miss is due to StarMed start-up costs and accelerated amortisation of finance costs related to the consolidation exercise.
• Higher outpatient load and average bill sizes boosted revenue by 6.7% YoY.
• EBITDA rose 8.6% YoY due to higher revenue intensity and effective cost management.

Maintain BUY with a lower DCF-derived TP of S$0.77. Given a more moderated growth, we lowered our revenue and EBITDA estimates for 2019-2020 by 5% and 7% respectively.

The Positives

• Both hospitals enjoyed higher patient load and larger average bill sizes. Mahkota (Mahkota Medical Centre) and Regency (Regency Specialist Hospital) saw a 3% YoY growth in total patient load to 120.1k in 1Q19. Local patient load grew slightly faster than foreign patient load and accounted for 77% of the Group’s patients as compared to 76% a year ago. Foreign patient load decreased due to the weakening Rupiah. Outpatient volume was the primary revenue driver, growing 1.3% YoY, while inpatient load remained relatively flat because of competition from heavily subsidised Malaysian public healthcare as well as a trend towards shorter lengths of stay. Average bill size continued to grow with higher revenue intensity and increasingly complex surgeries. Average inpatient and outpatient bill size rose 7.6% and 3.7% YoY respectively.
• Day Surgery cases continue to lift margins. Day Surgery is gaining traction as we continue to see bed occupancy rate trending downwards (59% in 1Q19, vs 61% in 1Q18), as patients enter into a shorter length of stay and higher average outpatient bill size. Note that the bed occupancy rate tracks overnight-stays and Day Surgery cases are billed under the outpatient The total number of operational beds remained stagnant at 437. HMI is still increasing their bed capacity because the beds are fully occupied at mid-day even though overnight occupancy rate is slowing.
• EBITDA margins improved 50 bps to 24.9%, due to higher revenue intensity (increasing complexity of surgeries) and effective cost management measures.

The Negative

• PATMI fell for the first time in two years (-22.8% YoY), due to FOREX loss of RM3.5mn (due to a weaker Malaysian ringgit), StarMed’s gestation start-up costs of RM3.1mn (majority belongs to StarMed’s 20 year tenure mortgage) and accelerated amortisation of RM2.5mn of capitalised expense. Excluding FOREX loss (RM3.5mn) and StarMed’s start-up costs (RM3.1mn), adjusted PATMI rose 8.7% YoY.
• Finance costs jumped 173.9% or RM3.6mn YoY. Amortisation of RM2.5mn of capitalised expense was recognised in relation to the term loan facility drawn down for the consolidation of ownership of Mahkota and Regency to 100% each. The remaining RM1.1mn was due to mortgage financing costs incurred by StarMed. Total debt spiked 66.9% YoY to RM241.4mn as at 30 Sep-18. Majority of the debt at from StarMed related to property mortgage at c.20 years tenure. However, net gearing remained stable at 0.56x as compared to 0.55x last quarter. We believe that HMI’s higher leverage will be well contained by healthy operating cash flows to meet its debt obligation.