Investment Highlights

• We maintain our BUY call on IHH Healthcare with an unchanged fair value of RM6.25/share. Our valuation is based on DCF with a WACC of 7.0%.

• IHH’s 9MFY20 core net profit of RM344mil (-46% YoY) is within our expectations, as we believe most of the year’s earnings will come in 4QFY20. The core net profit came up to 60% and 62% of our and consensus full year estimates.

• We favour IHH for its: (1) strong recovery potential in 4QFY20 and FY21F; (2) expansionary outlook; (3) effective cost cutting and capital efficiency methods; and (4) its position in the premium segment of the private healthcare sector, translating to high EBITDA margins of over 20%.

• 3QFY20 revenue grew to RM3,518mil (-7.1% YoY, +37.2% QoQ) on the back of higher inpatient admissions and outpatient volumes across all markets as pandemic restrictions are loosened. Also helpful was Covid-19- related revenue sources and the recovery of foreign patient volumes in Acibadem, Turkey.

• 3QFY20 core EBITDA climbed to RM1,022mil (+16% YoY, +379% QoQ), largely due to tight cost control and receipt of government grants and reliefs.

• All regions experienced improvements in revenue, EBITDA, EBITDA margins and inpatient admissions. Notably, Singapore provided a significant 42% of 3QFY20’s EBITDA. This is through government grants worth 11% of segmental EBITDA and its high inpatient revenue/admission value.

• Generally, occupancy rates and inpatient volumes are expected to improve over the course of 4QFY20 and 1QFY21. Despite a lack of foreign patients, inpatient revenue per admission remains elevated due to a higher case mix of pricier elective and acute cases.

• Key takeaways from IHH’s results briefing include:

1. The group builds on a geographical cluster strategy to achieve greater economies of scale and enhanced patient access. The recently acquired Prince Court Medical Centre (PCMC) boosts the group’s position in the Klang Valley, providing 4% of Malaysian 3QFY20 revenue.

2. The group is also actively divesting and recycling assets for greater capital efficiency, the latest being the upcoming divestment of Apollo Gleneagles Hospital in Kolkata.

3. IHH is making a breakthrough in the North Asia segment by containing costs while ramping up development. This is evidenced by improving EBITDA margins, though the segment remains loss making. Of these hospitals, Gleanagles Hong Kong Hospital has seen success in 3Q, with inpatient admissions increasing 19% QoQ and an average occupancy of 62% for about 200 operational beds.

4. India and Fortis hospitals are making a strong recovery, riding on Covid-19 treatment. Covid-19-related services contributed to 26% of 3Q revenue, while tight cost controls swung EBITDA positive in 3Q.

5. In Singapore, occupancy rates have dropped from 54% in 2Q to 52% in 3Q, largely due to a fall in Covid-19 patient volume. However, domestic volumes remain strong, with a gradually improving proportion of high-paying foreign patients.

6. Thus far IHH has not heard from the governments in countries of operation on their role in vaccine distribution and administration. Nevertheless, it notes positively that it has had collaborations with multiple governments on Covid-19 issues.

Source: AmInvest Research - 27 Nov 2020