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?