IHH - Trades At 41x Historical Earnings

It has seen strong backing from its institutional shareholders. At its current (05 June 2014) share price of RM4.18, IHH trades at a whopping 51 times historical earnings, with a market capitalisation of RM34.04bil.

It is the second largest hospital group in the world, only to the US-focused Hospital Corporation of America. It runs 37 hospitals with a combined capacity of more than 6,000 beds; employing more than 25,000 people.

It hopes to excel in high growth markets and are targeting India, China, Indo-China, Asean and the Middle East. And with IHH’s Turkish partnership through Acibadem Holding will tap into the rapidly emerging economies of Central Eastern Europe, Central Asia and North Africa.

Notwithstanding its plans, IHH is already quite well-established in its home markets in Singapore, Malaysia and Turkey which contribute 37.4%, 17.5% and 35.6% of its revenues respectively in its first quarter for the financial year 2014 (FY14) ended March 31.

These markets constitute a chunk or 90% to its overall topline. The markets have seen strong growth of late with the average revenue per inpatient admission (ARIA) and inpatient admission volumes (IAV) recording year-on-year (yoy) growth in its first quarter FY14. The Malaysian market’s ARIA and IAV had outperformed the rest of the group’s home markets with first quarter y-o-y growth of 8.5% and 9.3% respectively.

IHH shares are trading at a PE valuation of 51 times and an enterprise value to sales of 5.27 times that is deemed hefty to some. The story of premium valuations for IHH is not new either. During its IPO in July 2012, financial reports had noted that IHH had sought a valuation of 93 times PE on FY11’s financial performance.

Since then, IHH’s shares have risen by an impressive 49% from its IPO reference price of RM2.80.

Other than the FBM KLCI, IHH is also a constituent of Singapore’s FTSE Straits Times STI where it is also listed, the FTSE All-World Index, FTSE All-Emerging Index, FTSE Global Style Index and the MSCI Global Standard Indices (large cap segment) that carries with it the weightage and investment recognition from international fund managers.

The stock is widely held by fund managers (June 2014) from across the globe with a tight institutional shareholding structure of 93% that also includes majority shareholder Khazanah Nasional Bhd’s stake of 43.9%.

Its cornerstone investors include the Employees Provident Fund, the Kuwait Sovereign Wealth Fund and Singapore Sovereign Wealth Fund.

The high valuations by investors today (June 2014) may also be reflective of the global strong demand for quality private healthcare. IHH which has presence in 10 countries expects to tap into this demand and it notes that the breakeven periods for new hospitals have been shortened significantly.

In the 80s, if you build a hospital it took 10 years to break even; in the 90s this has shortened to about seven to eight years. In the 2000s, it takes about three years to break even.

IHH is committing a capex requirement of RM3.39bil from the second quarter of 2014 till FY16 compared with its capex of RM1.69bil in FY13 and RM1.1bil in FY12 respectively. Half of the allocated capex until 2016 of RM1.5bil will be ploughed into its Gleneagles Hong Kong Hospital that will be 60% funded through its bank facility while RM926.7mil is allocated for hospital expansions in Malaysia that will be sourced with operating cashflows and new bank facilities if required. A total of RM954.8mil would be channeled into expanding its Turkey Acibadem operations that would be funded internally and through Acibadem’s bank facilities.

However IHH’s capex appetite may eventually hold back earnings growth.

IHH has net debt to equity ratio of 0.11 times and a net debt to net tangible assets of 0.33 times as of March 31 2014.
It is sitting on RM1bil of funds as at June 2014. Its debt ratio is low with one time EBITDA debt service ratio and IHH could potentially go up to four times. There are some expectations that it may pare down some debt because of such a huge pile of cash.

New projects are evaluated and only considered on the basis that there is a sound pent-up demand for it to minimise the breakeven times as much as possible.

With the present (June 2014) development and expansion plans, IHH is on track to delivery and double its bed-count to 9,000 by 2018 from about 4,900 beds during its IPO.