3 Growth Drivers For IHH Healthcare Berhad

With a market capitalisation of S$16.6 billion, IHH Healthcare Bhd (SGX:Q0F) is — by far — the largest healthcare stock listed in Singapore. The group operates 49 hospitals and 30 medical centres around the world, including prominent private hospitals in Singapore, namely Gleneagles, Mount Elizabeth and Parkway.

In its most recent quarter, the group had a mixed performance.

On one hand, the company’s revenue and EBITDA (earnings before interest tax depreciation and amortisation) were up from a year ago, benefiting from the contribution of two newly opened hospitals, and organic growth from its existing hospitals.

On the other hand, the group’s net profit (after tax) for the quarter plunged 40% after excluding one-off gains seen last year. Teething issues, coupled with higher operating, and depreciation cost were the main culprits behind the decline.

However, despite the lower bottom line figures, there are still reasons to be optimistic for the group. Here are three growth drivers that can improve the company’s margins and profit in the future.

Full-year contribution from new hospitals 

IHH Healthcare has a vast a network of hospitals, medical centres and clinics, but it has no intention to rest on its laurels. The company is aggressively re-investing its cashflow into new projects, which include the expansion of its existing hospitals and the development of new hospitals.

As mentioned earlier, the group opened two new hospitals in March 2017, namely Gleneagles Hong Kong, and Acibadem Altunizade in Turkey. The former represents its first foray into China. The full year revenue contribution from both hospitals will happen this year.

As the two hospitals mature, their contribution to the bottom line should be more prominent as the hospitals gains traction, and the initial one-off operating expenses fade away.

More projects due for completion by 2019

IHH Healthcare has also initiated a few more projects that are due for completion by 2019.

The phase 2 expansion of Pantai Hospital in Kuala Lumpur, and the expansion of Acibadem Maslak in Turkey will increase the bed capacity of the hospitals by 120 beds and 195 beds, respectively. On top of that, the 350-bed Gleneagles Chengdu is slated to be opened this year. Gleaneagles Shanghai, which has a 450-bed capacity, is also expected to be completed in 2019.

These four projects, especially the two new hospital openings in China, is likely drive revenue growth.

There might be initial teething issues, and high start-up costs, but the long-term impact from these openings will likely be positive for the group’s bottom line.

Organic growth

IHH Healthcare’s portfolio of healthcare facilities are also generating more revenue over time. In its most recent quarter, average revenue per inpatient admission grew at most of its hospitals.

On top of that, inpatient volume also increased in all geographies except for Malaysia. As the population ages and middle class population grows, healthcare expenditure expected to increase over the next few years. The trends could provide a tailwind for the company’s organic growth for many years to come.

The Foolish bottom line

With the opening of new hospitals, there is bound to be short-term teething issues that will eat into margins. Hence, the lower profit we see in IHH’s recent earnings update.

However, investors should focus more on the long-term health of the company.

IHH Healthcare has strong cashflow from its operations, and a healthy balance sheet that should see it through any near-term start-up challenges as it expands its footprint in China. As such, I do believe, that once the new hospitals are fully up and running, the group will likely see healthy margins return together with strong bottom line growth.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.