IHH Healthcare Bhd
(March 8, RM6.00)
Maintain hold with a target price (TP) of RM6.47: IHH Healthcare Bhd’s extensive overseas operations mean that the company is exposed to a myriad of fluctuations in foreign exchange (forex) as well as exceptional items.

This complicates the underlying trend for the group and hence we attempt to decipher the many exceptional items at IHH.

We expect IHH to deliver strong headline net profit growth of approximately 100% year-on-year (y-o-y) in 2017 but this could be masked by many one-off exceptional items that dragged down 2016 net profit, creating a low base effect. Furthermore, additional exceptional items could affect 2017 headline net profit.

Losses from exceptional items ballooned to RM413 million in 2016 from RM180 million in 2015. Some of the major items reported in 2016 included a RM54.8 million gain on the disposal of a 90% interest in Shenton Insurance Pte Ltd, a RM132.7 million impairment charge on the Gleneagles Khubchandani Hospital investment in India, a settlement of RM53.6 million for value-added-tax claims in Turkey and an unrealised forex loss of RM335 million recognised by Acibadem Group.

We may see some of these items repeated in 2017, such as forex losses/gains and more impairment charges.

Recently, IHH has disposed of its 6.07% share of Apollo Hospitals Enterprise Ltd for RM710.9 million, realising approximately RM312.1 million in disposal gains. Although it is uncertain whether IHH would sell the remaining 4.78% stake, we do not rule out the possibility as it could be a strategy to streamline its operation in India. We are neutral to slightly positive about the disposal, as the selling price of 1,280 rupee (RM85)/share is not too far from the value we impute in our sum-of-parts valuation and the proceeds likely would be used to support working capital needs at its India hospitals.

We maintain our “hold” call with and fine-tune 2017 to 2019 earnings per share with an unchanged TP of RM6.47 after imputing the gain from the disposal in India. Excluding exceptional items, we forecast net profit to grow by 10% y-o-y in 2017 as we think the new hospital’s start-up losses and Turkey’s currency headwinds could dampen overall profit. — Affin Hwang Investment Bank Bhd, March 8