IHH - trading at more than 46 PE

At current level (01 Sept 2013), it is trading at more than 46 times estimated earnings 2013 – a hefty premium given that the second largest healthcare stock Raffles Medical Group is trading at 25.7 times forward earnings. So it was to be expected that the stock would lose some ground following the release of poor headline revenue and earnings numbers on Aug 27 2013.

For the quarter ended June 30, 2013 IHH reported a 38% decline in revenue to rm1.7 billion and a 61% decline in earnings to rm157 million.

However the numbers were distorted because IHH booked substantial revenue and earnings in 2012 from the sale of medical suites at its newly completed medical facility Mount Elizabeth Novena. Excluding the effects of the sale, the company says revenue would have grown 14% and core earnings 60% in the quarter.

In fact, year on year, IHH hhas been admitting more patients due to increase in capacity from new facilities. It has also been generating higher revenue for each patient it admits owing to a number of more complex medical cases as well as some price increases.

Mount Elizabeth Novena began to generate positive Ebitda during the quarter.

As they ramp up future economies of scale would definitely drive margins.

With four hospitals, IHH is the largest private healthcare operator in Singapore. In addition to the new Mount Elizabeth Novena, the company owns Mount Elizabeth Orchard, Gleneagles and Parkway East. It has a sizeable operations in Malaysia and Turkey, as well as operations and investments in China, India, HK, Vietnam, Macedonia and Brunei – making it one of the world’s largest listed private healthcare providers.

The company’s expansion at Mount Elizabeth Novena was eagerly awaited for the extra revenue and earnings it would bring in. It was reported that the facility would achieve breakeven in 2QFY2013 - thus paving the way for IHH to deliver its best year ever.

Market observers were also prediction an Ebitda breakeven for another new hospital in Turkey – Acibadem Bodrum – by 4QFY2013.

IHH’s plans to continue growing the business was viewed positively. The company has 16 projects underway. It is building three new hospitals in Malaysia and expanding three others. To has entered into consultancy agreements to manage two new hospitals in China and Abu Dhabi that should open early 2014. In India, it is in joint venture to build a new hospital that should also be completed in 2014. It is building a hospital in HK and. In Turkey, it is expanding three existing hospitals and building three new ones.

Longer term, market observers are positive about the company’s awarded concession for its 60% onwed Gleneagles HK hospital. When operations begin, charges will be 20% and 25% higher than the Singapore hospitals.

Risk of currency volatility that the group is exposed to due to it operates in multiple geographies. The risks include translation differences, forex gains and losses on unhedged foreign currency borrowings and a decrease in medical travelers to Singapore in the short term as a result of the stronger Singapore dollar.

IHH is not at great risk of seeing a decline in its patient volume at the Singapore dollar appreciates relative to the Indonesian rupiah since only 18% of total patients admitted to the Singapore hospitals come from Indonesia, the net contribution from this group is only about 3% of the group’s earnings.

The revenue from domestic patients has increased sharply, more than half of the cases from Indonesian patients are non elective treatments, and larger contributions from other markets dilute sensitivity to this risk.

The healthcare sector has traditionally been a more resilient sector in time of trouble.