Investment Highlights

• We downgrade our call on IHH Healthcare (IHH) to HOLD from BUY with a lower fair value (FV) of RM5.64/share (vs. RM6.26/share previously). Our valuation is based on DCF with a WACC of 7.0% and terminal growth rate of 3.5%. Incorporated in our FV is a 3% price premium for our ESG rating of 4 stars, awarded for its contribution toward helping curb the pandemic.

• In spite of positive results, we are downgrading IHH to a HOLD as the Turkish lira continues to hit new lows. We are concerned on its effects on its Acibadem contributions, as well as its drag on investor confidence. For now, we lower our FV as we are not expecting any significant price rerating until this situation is resolved.

• Additionally, we raise our capex projections and reduce EBIT forecasts, which were previously too optimistic. We foresee the likelihood of mass greenfield expansions in the following decade as the group continues to build on its Greater China and East Europe presence, which may cut FCF values for the next couple of years.

• IHH’s 1QFY21 core net profit of RM314.5 mil came above expectations, making up 29%/31% of our/consensus full year expectations. Thus we raise our FY21/FY22/FY23 earnings forecasts by 32%/18%/15% respectively, underpinned by significant contributions from Covid-19- related services and pent-up demand likely to spill into the following years.

• Revenue grew by 11% YoY and 5% QoQ in 1QFY21, with growth experienced in all geographical regions. The overarching trend was revenue and EBITDA experienced both QoQ and YoY growth. Covid-related services offered substantial contribution, providing >10% of revenue across the map.

• IHH’s Malaysian segment’s revenue and EBITDA grew by 10% YoY and 1% QoQ in 1QFY21 respectively, bolstered by earnings from Prince Court Medical Centre. A higher proportion of lower-margin Covid-related services caused EBITDA margins to contract by 2.3% YoY.

• Only Turkey saw improved occupancy rates on a QoQ basis while the rest faced with declines. While Malaysia is expected to report further disappointing rates following the implementation of MCO 3.0, India’s rates will likely skyrocket as result of a surge in Covid-19 cases.
   
• The group’s North Asia segment’s EBITDA did see some contraction on a QoQ basis. This is due to Gleneagles Hong Kong posting slightly higher EBITDA losses on a QoQ basis as Hong Kong continues to stay in a protracted lockdown.

Source: AmInvest Research - 1 Jun 2021