Investment Highlights

• We maintain BUY on IHH Healthcare with a lower fair value of RM6.25/share (vs. RM6.58/share previously). Our valuation is based on DCF with a WACC of 7.0%.

• IHH’s 1HFY20 core net profit of RM105mil (-75% YoY) missed expectations, accounting for 13% of our and 16% of street’s full year earnings estimates.

• We cut our earnings forecasts by 28% for FY20F, 15% for FY21F and 8% for FY22F. We assume lower net margins due to the adverse impact of the Covid-19 pandemic.

• IHH’s 2QFY20 revenue fell to RM2,565mil (-30% YoY; -28% QoQ). This was largely due to the impact of the Covid-19 pandemic. Patients postponed non-urgent and nonessential treatments during the period. Foreign patient volume also dropped due to travel restrictions across the different countries that IHH operates in.

• The drop in sales was slightly offset by Covid-19-related services that the group provides like the Covid-19 screening and laboratory tests in Malaysia and Singapore. 2QFY20 EBITDA tumbled to RM268mil (-65% YoY; -64% QoQ) while EBITDA margin dropped to 13% (-9ppt YoY; - 11ppt QoQ). The decrease was partly offset by government grants and reliefs received, on top of cost containment measures.

• Segmental highlights are as follows;
  1. Parkway Pantai’s 2QFY20 revenue slipped to RM1,847mil (- 30% YoY; -26% QoQ). This was due to lower inpatient volume in Singapore (-34% YoY; -25% QoQ), Malaysia (-43% YoY; -40% QoQ) and India (-45% YoY; 43% QoQ).
  
  However, average revenue per patient (revenue intensity) improved across its operations in Singapore (+9 YoY; +1% QoQ), Malaysia (+22% YoY; +21% QoQ) and India (+2% YoY; +1% QoQ).
  
  We believe revenue intensity was higher because of the change in case mix as more urgent and critical cases were taken and non-urgent and non-essential cases were deferred.
  
  Parkway Pantai’s 2QFY20 EBITDA slumped to RM179mil (- 68% YoY; -63% QoQ) while EBITDA margin dropped to 10% (-12ppt YoY; -10ppt QoQ) in tandem with lower revenue. The group has also incurred additional costs related to the Covid- 19 pandemic. The decrease was partly offset by government grants and reliefs received, on top of the cost of containment measures.
  
  2. Acibadem Holdings 2QFY20 revenue slid to RM614mil (-31% YoY; -36% QoQ). Inpatient volume was lower at 35.8K (-34% YoY; -36% QoQ). Revenue intensity was higher at RM10.1K (+24% YoY; +14% QoQ). EBITDA dropped to RM74mil (-60% YoY; -66% QoQ) while EBITDA margin was lower at 12% (-9ppt YoY; -11ppt QoQ).
   
• The worst impact was felt in April and May where occupancy rates slumped to 30%–55% (vs. 65–70% pre-Covid 19) due to widespread movement restrictions. Since May 2020, the group has rolled out telemedicine in its key markets to complement its existing services to cater to evolving patient needs. The group had reduced its forex exposure on its unhedged non-Lira gross debt to €158mil in July 2020.
   
• The group has been seeing a recovery since June as economies reopen. There have been more elective surgery cases and occupancy rates have recovered to 40–60% across IHH’’s network. The group was PATAMI positive in June 2020. Also, the group has deferred non-critical capex in order to manage its costs.

• Moving forward, we expect IHH’s performance to be better in 2HFY20 following the recovery MCO where restrictions are further eased. We believe patient admission volume will improve although revenue intensity is expected to be lower as more non-elective and non-essential cases are taken.

• In the long term, we expect the group to continue growing 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, bigger-than-expected pre-operating and start-up costs of new operations and wage inflation and prolonged Covid-19 pandemic.

• 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 - 28 Aug 2020