Health Management International: Setting for next expansion August 29, 2017

PSR Recommendation: BUYStatus: MaintainedTarget Price: 0.83
  • FY17 Revenue was in line with expectation; while Core PATMI missed by 7% due to higher than expected tax
  • Aggregate bed capacity to increase by 16% in FY18; Regency’s new extension block to more than double its current capacity in FY21
  • Proposed final dividend of RM1.0 Cents per share (20% of FY17 Core EPS)
  • Maintained Buy with unchanged DCF-derived TP of S$0.83

1

The positives

  • Both hospitals in Malaysia continued to register growth in revenue and patient volume. In particular, the younger hospital, Regency Specialist Hospital, continued to record double digit growth (Revenue +14.2% YoY and Patient load +27.2% YoY). Notably, patient load grew 8.8% YoY despite that FY17 being weighed down by two Hari Raya festive days (Jul-16 and Jun-17) compared to once in FY16 (Jul-15). Patients typically avoid seeking healthcare services during the Ramadhan month, while doctors go on leave during the festive season. We expect a higher hospital revenue in 1Q18 as the delayed effect of 2017 Hari Raya will be reflected in Jul-17.
  • Back to net debt, but manageable. The Group is in a net debt position of RM87mn as at end-FY17 as compared to net cash of RM37.1mn a year ago. The Group plans to pay down 50% of its acquisition debt by Dec-18, which we think that it is achievable as it has (i) pared down c.25% in 4Q17, and (ii) strong operating cash flows. Net Debt/EBITDA improved to 0.9x from 1.0x; while gearing declines to 0.5x from 0.6x as at 31 Mar-17.

The negatives

  • More foreign patients but average hospital bill size per patient was flattish YoY. The shift from inpatient to outpatient care offsets the 21.4% YoY growth in foreign patient load. However, we expect revenue intensity to expand as HMI enhance its range of specialist healthcare offerings.

Outlook

FY18 outlook remains positive. Both Mahkota Medical Centre and Regency Specialist Hospital continue to ramp up capacity on increasing demand. Both hospitals will add 34 operational beds each (or +15.7%), leading to a total bed capacity of 500 by FY18.

Meanwhile, the new hospital extension block at Regency will transform it from a 218-bed tertiary hospital to a 380-bed hospital, and eventually to a 500-bed hospital.

The new extension block will also provide the additional capacity for more clinical services, operating theatres, as well as clinic suites for sale or rental to doctors. Construction is expected to commence in FY18 after obtaining necessary approvals and is slated to commission in FY21. The construction cost is estimated at RM160mn and will be funded by debt and internal cash resources.

The Groups targets to reach 840 aggregate bed capacity – Mahkota (shifting its back office to another location will free up space for another 40 bed; eventual capacity of 340 beds) and Regency (eventual capacity of 500 beds).

Maintained Buy with unchanged DCF-derived TP of S$0.83

We maintained our view that HMI will benefit from the socioeconomic tailwinds arising from (i) government initiatives to improve infrastructure and regional connectivity; (ii) increasing domestic insurance take-up rate; (iii) ageing population; and (iv) most cost competitive pricing compared to regional peers.

The consolidation of ownership in 48.9%-owned MMC and 60.8%-owned RSH to 100% each was completed in Mar-17. We expect higher dividend payout with a full hospitals ownership structure, i.e. 100% of MMC’s and RSH’s earnings being attributable to shareholders.

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Profile photo of Soh Lin Sin

Soh Lin Sin
Investment Analyst
Phillip Securities Research Pte Ltd

Lin Sin has been an investment analyst in Phillip Securities Research since June 2014, where she started as an economist, focusing on China and ASEAN macroeconomics. Currently, she covers primarily the Consumers and Healthcare sectors in Singapore equities market.

She graduated with a Bachelor of Science in Mathematics and Economics from NTU.

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