Investment Highlights

• We retain our HOLD call on IHH Healthcare (IHH) with an unchanged DCF-derived fair value (FV) of RM7.00 based on a WACC of 7%, terminal growth rate of 3.5% and a 3% premium for our ESG rating of 4 stars.

• We also maintain FY22F–FY24F earnings given that IHH’s 1QFY22 core net profit of RM407mil was within our expectation, accounting for 22% of our FY22F net profit, in which subsequent quarters are likely to be stronger amid the receding impact of the Covid-19 pandemic. However, the results appear above market expectations at 25% of street’s full-year forecast. No interim dividend was declared.

• YoY, IHH’s 1QFY22 core net profit rose 21% in tandem with a revenue growth of 5.5% from the recovery of local patient admissions together with increased Covid-19 screenings, laboratory testing and vaccination services.

• This was boosted by the addition of DDRC SRL Diagnostics in April 2021 and General Hospital Acibadem Bel Medic in July 2021, partially offset by: i) the disposal of Continental Hospitals in Dec 2021; ii) temporary closure of China clinics in March this year amid a spike in Covid cases in Shanghai; and iii) the lira depreciation on the Turkey operations.

• On a QoQ comparison, 1QFY22 core net profit slid 8% in tandem with a 7% revenue contraction from a seasonally softer quarter together with Omicron variant waves dampening inpatient admissions for India (-11%), Turkey/Europe (-5%) and Malaysia (-3%).

• The weaker QoQ performance also stemmed from lower government grant/subsidies and higher staff costs. In the group, only Singapore’s inpatient admissions grew by 2% QoQ with revenue per inpatient rising by 7.5% as 1Q2022 share of Covid-related services slid to 22% of revenue from 29% in 4Q2021.

• In the near term, IHH expects headwinds from declining Covid-19 related treatments together with rising inflationary costs on energy and staff, partly mitigated by a recovery in non-Covid medical services to domestic and foreign patients. In the longer term, management aims to leverage its international network to optimise cost savings while eyeing strategic acquisitions and investments for stronger returns.

• Based on Sime Darby’s 3QFY22 (YE June) healthcare EBIT of RM13mil, we estimate that the indicative enterprise value of RM5.7bil (US$1.35bil) for the acquisition of the entire stake in Ramsay Sime Darby Healthcare could raise IHH’s FY22F EV/EBITDA of 14.7x from 13.5x while increasing FY22F net gearing to 57% from 32% (including perpetual securities). Hence we do not view the stock’s FY22F PE of 31x as compelling, despite being below its 2-year average of 36x, with an unexciting dividend yield of 2%.

Source: AmInvest Research - 27 May 2022