• Both 1H18 Revenue and PATMI met 49% of our full year FY2018 estimations
• Margins expansion on patient volume and bill size growth, as well as realizing gain from its cost-saving measures
• Declared interim dividend of RM1.0 Cents per share; Adopting dividend policy of paying out ≥20% of Core PATMI
• Maintain ‘BUY’ with unchanged DCF-derived TP of S$0.83

The Positives

• Expecting a strong FY18e. 1H18 Revenue/NPAT grew 7.7%/9.6% YoY. 2H is typically seasonally stronger. We expect revenue intensity and patient load growth to extend their upward trajectory. Meanwhile, its partnership with Gakken Cocofump to introduce elderly care training into Singapore and the region could add a new revenue stream to its Education business.
• Foreign patient load growth (+15.5% YoY) continued to outpace local patient’s (2.8% YoY). Malaysia private healthcare services remain price competitive as compared to its neighbouring countries despite strengthening MYR. Recall that medical fees in Malaysia is moderated by the Medical Fee Schedule.
• Intentional shift towards more outpatient services. The Group is moving towards handling more Day Surgery cases, in line with the growing demand. A faster growth in outpatient load (higher throughput), lower bed occupancy ratio (length of stay decreased), and a strong9% YoY growth from average outpatient bill size (higher revenue intensity), reflect increased efficiency and more Day Surgery cases. Its Day Surgery Centre in Mahkota Medical Centre (with two Day Surgery Units) is gaining traction.
• Declared an interim dividend of RM1.0 Cents per share and adopting a dividend policy to payout not less 20% of the Group’s core earnings. We view the adoption of dividend policy positively and it should be supported by its strong operating cash flows. The payout ratio guided by the policy is the same as our initial forecast.

The Negatives

• Finance costs increased by 6.7x due to the drawdown of S$53.0mn of the term loan facility for the purposes of the acquisition of non-controlling interests in Mahkota Medical Centre and Regency Specialist Hospital. Nonetheless, the pressure from finance costs should taper off as the Group has pared down 57% of its acquisition debt, bringing Net debt/T12M Ebitda and gearing ratio down to 0.3x and 0.2x from 1.7x and 0.5x in end-FY17, respectively.

Outlook

Outlook remains positive. The upgrading and expansion plans for Mahkota Medical Centre and Regency Specialist Hospital are on track to meet the increasing medical demand in the region.

• Both hospitals will add c.30 operational beds each (or +15% YoY), leading to a total bed capacity of 500 by end-FY18.
• Mahkota is also expanding its Radiology and other departments for more clinical areas and is expected to be completed by end-2018.
• The construction of its new hospital extension block at Regency is expected to commence in FY18 after obtaining necessary approvals and is slated to commission in FY21.

The S$11.0mn net proceeds from the Placement Shares to Heliconia Capital Management is earmarked for the Group’s business expansion and has not yet been utilised.

Maintain BUY with unchanged DCF-derived TP of S$0.83

We maintain our view that HMI will benefit from the socioeconomic tailwinds arising from (i) public and private initiatives to improve infrastructure and regional connectivity; (ii) increasing domestic insurance take-up rate; (iii) favourable demographics; and (iv) cost competitive pricing compared to regional peers. 

The Group targets to reach 840 aggregate bed capacity – Mahkota (eventual capacity of 340 beds) and Regency (eventual capacity of 500 beds).