Investment Highlights

• We maintain our HOLD call on IHH Healthcare (IHH) with an unchanged fair value (FV) of RM6.29/share. Our valuation is based on a 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.

• We remain positive on the group’s growth prospects underpinned by the expansion of its laboratory services, cost-cutting and clustering strategies, as well as solid growth in Hong Kong Gleneagles. However, with PE ratio pushing well over 40x for FY22F EPS, we believe that the multiyear growth prospects have largely been priced in.

• Here are some key takeaways from the meeting:

1. IHH has seen an EBITDA breakeven in Gleneagles Hong Kong at May (as targeted). The group is now shifting focus towards achieving a net income breakeven. The hospitals’ growth trajectory is expected to be upwards as heavy lifting in overcoming overhead costs have already been overcome.

The group cautioned that while China remains a solid market prospect, it requires more breadth and longevity to break even. The group will be taking an impairment hit for some assets as a more prudent method in managing its balance sheet.

2. IHH’s laboratory business, which brought in a revenue of RM975mil in 1HFY21 across all geographical markets, has been successful. The group will continue to drive the business due to the solid returns despite low capex requirements. The group highlighted that the EBITDA margins are much higher than the average of 25% seen in hospitals. The segment’s contribution has seen steady growth throughout the span of the pandemic

Currently, most of the revenue is from internal contributions, although external contributions are growing rapidly. India, via SRL Diagnostics owned by Fortis, owns >420 outlets and is by far the largest revenue contributor. Singapore sits at second place.

We expect the segment to grow even further in this coming year as Covid-19 has likely become endemic. While we expect non-Covid-19 lab work to decrease subject to Covid-19 cases resurgences, Covid-19-related testing is expected to consistently increase as the economy opens up further.

3. IHH cautioned that it may not be able to replicate 1HFY21’s cost efficiencies in 2HFY21. The group cited higher wage costs, the need to give back to frontline workers, less government grants and a sharp drop in Covid-19 patients in India, which offers a slightly higher revenue contribution.

However, the group maintained that the outlook for 3QFY21 is positive, as the volumes of non-Covid-19 patients across geographical markets are expected to recover. The countries in the region have different dynamics of recovery. India’s patient mix is quick to respond to the declines in Covid-19 case volumes, whereas Singapore is more gradual.

All geographical segments saw improvements in occupancy rate (both QoQ and YoY) in the last quarter. Singapore has recovered its domestic volume, although foreign patients have yet to return. Covid-19 service revenue contributed to a sizeable 24% of Singapore revenue.

4. Prince Court Medical Centre (PCMC) contributed RM65mil (10%) to Malaysian revenue in 2QFY21. Aside from that, performance is expected to remain muted in 3QFY21, given the stricter lockdown impositions. Roughly 300 non-Covid-19 patients were forwarded by the Ministry of Health in 2QFY21, although larger volumes will come in 3QFY21 as the government struggled to bear the burden of Covid-19 patients.

Source: AmInvest Research - 30 Aug 2021