The Positives
The Negative
Starmed’s gestation costs to weigh down PATMI in the next 2 to 3 years. Core PATMI of RM14.6mn fell 28.4% YoY, making up 44.3% of our full-year estimate, below our expectations. The weakening of the Malaysian ringgit resulted in FOREX losses of RM3.0mn (2Q18: +RM0.1mn). Distribution and marketing expenses rose RM0.9mn due to increased marketing to the community and corporate clients. Administrative expenses spiked RM6.2mn due to Starmed and rising operating costs in the Group. Finance costs rose by RM0.8mn due to reduced finance costs from restructuring activities offset by RM1.2mn mortgage financing incurred by Starmed. Profit attributable to NCI rose RM1.7mn due to contribution made to the remaining 30% of Starmed’s shareholders. Starmed’s loss in 2Q19 is around RM5mn with negligible revenue.
Outlook
We remain positive on the outlook for HMI due to its resilient hospital operations and growth trajectory to meet the growing demand.
Progressive upgrading and refurbishing of older wards to maintain a new and consistently upgraded facility for the patients.
Construction of Regency’s new extension block has begun and with its targeted commissioning in 2021, Regency will become a 380-bed tertiary hospital, with the potential to expand capacity to 500 beds.
KPJ Bandar Dato Onn (Johor) and Columbia Asia South Key (Johor) expected to open within next 6 to 12 months, with each commissioning with an initial phase of 100 beds. Regency would face increasing competition for specialists, staff and patients.
Starmed started operations in 1Q19 after obtaining its license with the official launch expected in the second half of this year. HMI owns 70% of StarMed with the remaining 30% owned by doctors. StarMed’s gestation costs is estimated to drag down margins for 2-3 years before it breaks even. HMI currently owns the 5th-7th floor while renting the 8th floor. HMI has entered into agreements to purchase additional units (1st, 8th and 9th floors) with an aggregate area of 10,602 sqft. Key growth drivers for StarMed will be higher insurance-holding population, ageing population and medical tourism. We factored in RM1.6-2.2mn in EBIT loss p.a. for each of the first three years of operations.
HMI announced an initial S$4.2mn investment for a 28% stake in a chain of 16 primary care clinics in Singapore. HMI’s stake to increase over time subject to further requests for funding and satisfaction of certain conditions. Despite intense competition in the primary healthcare space HMI believes that acquiring Plus is viable due to its (i) efficiency, (ii) high patient load, (iii) affordability and (iv) greater outreach into the community will be beneficial for Starmed to obtain referrals.
Maintain BUY with an unchanged DCF-derived TP of S$0.77.
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. Potential risks include (i) greater competition; (ii) disadvantageous regulatory changes; and (iii) longer than expected gestation period.
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Min Ying covers the Banking and Finance sectors. She has experience in external audit and corporate tax roles.
She graduated with a Bachelor of Accountancy with a major in Finance from SMU.
