• 9M18 Revenue/Core PATMI met 73%/76% of our full year estimations
• Remains a medical tourism hotspot; 9M18 Foreign patient load +15% YoY
• Improving operating efficiencies, with higher Day Surgery cases and benefitting from its cost-saving initiatives; FY18e EBITDA margin could +2pps YoY to c.25%
• Maintain BUY with unchanged DCF-derived TP of S$0.83

The Positives

• Both hospitals ramping up patient volume and average bill sizes. Mahkota (Mahkota Medical Centre) and Regency (Regency Specialist Hospital) saw 2.7% YoY growth in both inpatients and outpatients load. 9M18 foreign patient load grew 15% YoY, faster than local patient load growth at 4%, and accounts for 23% of the Group’s patients (vs 21% in 9M17).

Average bill size continued to grow with higher revenue intensity and increasingly complex surgeries. Average outpatient bill size and average inpatient bill size rose 9% and 3.8% YoY, respectively.

• Higher Day Surgery cases to lift margins. As advocated in our previous report, Day Surgery is gaining traction as we continue to see bed occupancy rate trending downward (c.59% in 9M18, vs c.63% in 9M17) and higher average outpatient bill size. Note that the bed occupancy rate tracks overnight-stay and Day Surgery cases are billed under outpatient category. Total number of operational beds remained stable at 437.
• EBITDA margins improving; FY18e EBITDA margin could reach c.25% (c.2 percentage points higher than FY17’s). Operating efficiencies improved with Day Surgery getting traction, driving up revenue intensity, alongside Group’s effort in streamlining procurement processes.

The Negative

• Finance costs more than doubled or increased RM0.87mn YoY. Recall that the Group drawdown a S$53.0mn from its term loan facility in Mar-17 to partially fund the acquisition of non-controlling interest of its two hospitals. Nonetheless, the Group’s commitment to pare down debt has strengthened its balance sheet. Within a year, the Group has repaid 62.7% of the loan. Total debt declined 41.4% YoY to MYR 95.9mn as at 31 Mar-18 with net gearing improved to 0.1x from 0.6x a year ago.

Coupled with the S$11.0mn net proceeds from the Placement Shares to Heliconia Capital Management, which has not yet been utilised, the Group now has greater financial flexibility to pursue any business or investment opportunities.

Outlook

Positive outlook with upgrading and expansion plans in Mahkota and Regency on track to meet the growing demand.

• Mahkota has opened its new ward (i.e. ward 9B with 36 beds), allowing it to refurbish older wards over the next 2 years. It is also currently undergoing a small extension to the East Wing for more clinical space for diagnostic radiology and other departments.
• Regency’s expansion plan is on track. The new extension block will more than double its existing capacity with additional inpatient beds (from 218-bed to 380, and eventually 500), clinical services, operating theatres and clinical suites. The hospital extension block in approval process, land preparation is ongoing, and construction is expected to commence in 2018. It is slated to commission in 2021.
• Meanwhile, both hospitals continue to develop their Centres of Excellence and recruit skilled sub-specialists to broaden their service offerings.
• Intensifying competition in Melaka and Johor is a concern, but we believe HMI’s first mover advantage and established track record would enable it to gain a foothold in these areas, while the new competing hospitals ramp up their operations.
• We do not expect any significant impact on Malaysia’s Private Healthcare Facilities and Services Act arising from the change in government.

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.