Investment Highlights

• We maintain our HOLD recommendation on IHH Healthcare (IHH) with a higher FV of RM6.06 based on DCF after adjusting our discount rate WACC to 7.4% from 8.4% to reflect a lower risk-free rate.

• Our FY20F and FY21F earnings forecasts are slightly higher by 2.0% and 1.4% after updating our FY19 numbers and key metrics.

• FY19 core net profit of RM920.7mil (-10.4%) was largely within our and street’s expectations, accounting for 107% and 100% of full-year earnings forecasts respectively.

• IHH’s FY19 top line grew 29.4% YoY to RM14,912mil while PBT margin inched up 0.5ppt to 7.0%. IHH benefitted from a sustained organic growth, the continuous ramp-up of Gleneagles Hong Kong Hospital (GHK) and Acibadem Altunizade Hospital, and contribution from the recently acquired Amanjaya and Fortis. Medical tourism also continued to improve in IHH’s Singapore, Malaysia and Turkey operations.

• IHH’s profitability was partly dragged by Gleneagles Chengdu’s pre-operating costs (hiring and preparation for its opening in October 2019).

• Core net profit was 10% lower YoY in FY19 as interest expense rose resulting from additional loans taken for acquisition, working capital and conversion of interests (Euro to TL).

• Further drags were forex and fair value losses on forward exchange contacts as well as higher tax (due to certain non-deductible expenses, unrecognized tax losses and reversal of deferred tax assets in 4QFY19).

• Segmental highlights are as follows;

1. Parkway Pantai’s revenue climbed 44.2% YoY to RM10,745mil in FY19 due to improved contribution from GHK, Amanjaya (RM33.4mil) and Fortis (RM2,728.5mil). There was a one-off RM28.5mil trustee management fee income relating to the disposal of RHT assets. Inpatient admissions and revenue intensity (average revenue per patient) increased in Parkway Pantai’s Singapore and Malaysia hospitals. However, India hospitals’ revenue intensity decreased in FY19 as Fortis’ revenue intensity is generally lower than its existing operations in India due to the difference in its case mix

We estimate that EBITDA margin declined by roughly 2.0ppt to around 18.4% after excluding the impact of the MFRS 16. Although its margins were boosted by GHK’s decreasing losses of RM156.7mil in FY19 (loss of RM178.1mil in FY18), the inclusion of Fortis (EBITDA margin of roughly 10.8%) diluted the segment’s margins. Fortis was acquired in November 2018.

2. Acibadem Holdings revenue increased 2.4% YoY to RM3,764.7mil in FY19 while EBITDA surged 38.8% to RM853.5mil. EBITDA margin rose 5.9ppt YoY to 16.8% in FY19. This was largely impacted by currency exchange as well as the MFRS 16 impact. The segment’s growth was largely attributed to the continuous ramp-up of Acibadem Altunizade Hospital, higher capacity in Acibadem Maslak Hospital (expansion completed October 2018) as well as improvement in medical tourism in the region.

However, its inpatient admissions declined 3.5% YoY in FY19 due to fewer local patients at its non-Istanbul hospitals. Revenue intensity grew 17.9% YoY in FY19 on the back of price increases imposed on private insurance and out-of-pocket patients. The segment’s EBITDA was boosted by gain on disposal of medical equipment and government incentives.

• Key takeaways from last Friday’s tele-conference are as follows:
• 1. GHK saw reduced occupancy due to the protests in Hong Kong. Non-urgent and non-essential procedures were also deferred due to the situation. This resulted in a lower occupancy rate of 50% in 4QFY19 and bigger operating loss of RM49.4mil (negative EBITDA of RM39.4mil in 3QFY19).
• 2. The group anticipates some margin dilution due to pre-operating costs and gestational costs for IHH’s Gleneagles Chengdu Hospital, which commenced operations in October 2019. However, the construction of Gleneagles Shanghai Hospital (initially slated to open in late FY20 with a 450-bed capacity) was halted as instructed by the Chinese government as part of the measure to control the Covid-19 spread. The opening date now depends on when the group can resume construction; and
• 3. As shown in Exhibit 2, Acibadem Holding’s non-lira debt exposure has declined from €583mil to €226mil in end-2019. YTD, the group has also refinanced another €50mil debt and swapped €37mil into lira debt. We believe this will reduce the group’s foreign exchange exposure moving forward.
• We believe IHH’s subsequent performance will be dampened by the Covid-19 outbreak as: 1) patients delay nonessential and non-emergency treatments; and 2) a slowdown in medical tourism.
• We expect the group to continue to grow on the back of sustained demand growth in all of its markets, expansion in multiple countries, better operational metrics, and tighter cost controls. Risks to earnings are pricing controls, pre-operating and start-up costs of new operations and wage inflation.

• We like IHH for: (1) its strong prospects in the private healthcare sector backed by rising affluence and the aging population; and (2) its position in the premium segment of the private healthcare sector, translating to high EBITDA margins of around 20%. However, we are wary of the geopolitical risks from its Turkish and China operations due to the volatile currency and political climate

Source: AmInvest Research - 2 Mar 2020