Friday, May 24, 2013

Where is the bullishness on IHH coming from?

I was wrong to think that IHH would probably be too expensive when this stock was listed last year. It actually is expensive and getting more expensive. Today, its market capitalisation is RM32.1 billion.  Amazing!

IHH's last year's IPO price was around RM2.85. Today, less than a year it is priced at RM3.95. But with the much fanfare, is it really that attractive?

Just yesterday, it announced its first quarter result. This result would perhaps be closer to the more real result, we expect to see in future, after the opening of the Mount Elizabeth Novena in Singapore, apparently a 6 star like hospital. This 1Q13 quarter's results is where you would not see extraordinary income from the locking in of profits from just accounting entry.

For the 1Q13, it registered a Profit Attributable to Shareholders of around RM127 million. See below. Hospital's business is hardly a cyclical business. If any, in fact the lowest period would be the fourth quarter where people are moving away for holidays. Hence the first quarter results is expected to be a better one. So, from here, what can we expect looking forward for the full year? It would only register a full year real results with profits of somewhere around RM500 million.

With this number, I in fact was too bullish. I was thinking of somewhere more than that - between RM600 to RM700 million profits attributable to shareholders, at the top end, last year. Remember, this year is supposed to be the performing year. In the 1Q13, where is the performance?

If it is going to be performing somewhere along the line of RM500 million to RM600 million, that is about 64 times PE we are talking about. Many people would like to use EBITDA, especially when they are finding it hard to explain the slower growth.

EBITDA is great but it is greater for companies that have spent a huge sum of money previously to expand because of the huge depreciation or amortisation. An example of a good company to look at EBITDA would be Malaysia Airport, post the KLIA2. However, IHH is a company which would need to continuously invest. It is promising or rather telling about the China (or Hong Kong) and South East Asia stories. That means what? It needs to invest.

Another thing about hospital is also about investment for equipment. Look below, for the 1Q13, where is the free cash flow? Somewhere along the line of RM148 million for one quarter. It is not good enough for the valuation one pays.

From the latest numbers, IHH still has around RM3.6 billion debt against cash of RM1.7 billion. That is not worrisome, but it is not fantastic either. The company is talking about expansion. We already see the free cash flow to be not too exciting, hence the reinvestment has to be much controlled. The balance sheet is not too strong, hence good dividends will be tough in near future, although it will pay some. So where is the bullishness coming from?


reyes430 said...

Hi,how do you justified that, "Somewhere along the line of RM148 million for one quarter. It is not good enough for the valuation one pays."

If we take the free cash flow over the revenue, we could get around 9%, isn't it a good number?

felicity said...

Hi Reyes

Say the FCF for IHH full year is getting to RM600 million, at today's market cap of RM32 billion, we are paying somewhere, Price to FCF of 50x, don't think it is good enough.

FCF = Operational cashflow - capital expenditure


reyes430 said...

Hi felicity

Thanks for your reply,so in what range of price to FCF is deemed as comfortable for you? Or we could say relatively undervalued? Thanks for your enlighten.

felicity said...

P / FCF is not the only benchmark, but at todays cost of fund, probably around 20x. It all depends on the growth factor, as well as the industry. For hospitals, I would think the tolerance could be higher due to the potential growth, but what I am saying is that (to me), this kind of valuation is too expensive for me.

reyes430 said...

Great explanation from you. Much appreciated. Thanks :-)

Multi said...

I guess this kind of stock attract big investors bcos of its "liquidity" and of course, the growth story which I dont think is convincing.

When the market is flooded with cash, especially the big investors, they will go for highly liquid stocks so that when they need to get out later, they could do it ASAP also, even at PE of more than 30 times. Not for value investors!!