Investment Highlights

• We reiterate our Neutral stance on the healthcare sector. We expect a flattish 2HFY22F earnings growth for IHH Healthcare (IHH) as the continued recovery of patient admissions in Malaysia and Singapore may be offset by Acibadem’s margin erosion from the high inflation in Turkiye. Historically, Acibadem accounted for 25% of pre-pandemic FY18-19 group EBITDA. For Apex Healthcare (Apex), we take a slightly conservative stance that the 2HFY22F earnings could be sequentially stable, consistent with management guidance on some potential moderation in 4QFY22F. However, there is a high chance of upward revision as we view Apex to be a beneficiary of the recently rising flu cases and Omicron became a community respiratory illness.

• 1H2022 financial highlights:
  • IHH came in below expectation. IHH’s 1HFY22 core net profit decreased 9.3% YoY to RM725mil, accounting for 40% of our earlier FY22F earnings and 44% of consensus, mainly attributable to the fading high-margin Covid-related services (from 16% in 2QFY21 to 3% in 2QFY22) and (b) inflationary pressures, particularly staff and energy costs.
  • Apex beat expectations as the company’s 1HFY22 core net profit rose 57.8% YoY to RM38.6mil, accounting for 54% of our earlier FY22F forecast and 56% of consensus. Notably, Apex’s 2QFY22 core earnings soared 58% QoQ to an all-time record of RM23.6mil. The strong performance was mainly underpinned by multiple factors: (a) stronger demand for pharmaceuticals and consumer healthcare, (b) better gross profit margin from increased share of higher margin manufacturing division, and (c) an 8x substantial improvement in pre-tax contribution from the 40%-owned Straits Apex.
• IHH to benefit from recovery of inpatient admissions… IHH is poised to benefit from the continued recovery in foreign and local patient admissions amid continuous relaxation of lockdown measures and travel restrictions, especially in Malaysia and Singapore (Exhibit 3). On the other hand, IHH has exceeded its 2020-2024 target of doubling its ROE, which reached 8.8% in 2QFY22 (vs. 3.8% in 2019). Moreover, the group aims to deliver a double-digit FY23F ROE vs our forecast of 9.6%. If this materialises, we believe IHH’s P/BV ratio could be revalued upwards by 8.7% to 2.5x (assuming 12% ROE in FY23F) as compared to our FY23F target P/BV ratio of 2.3x, as a stronger ROE tends to be accompanied by higher P/BV ratios over the past 9 years (Exhibit 4).

• … but impacted by Turkiye’s hyperinflation. Turkish Consumer Price Index (CPI) increased by 80.2% YoY in Aug 2022 as compared to 11%–19% over past 5 years. Based on Bloomberg Consensus, Turkish inflation rate could reach 72.2% in 2022 and decelerate to 38.4% in 2023. We believe the one-time price hike in Jan 2022 which increased Turkiye’s blended average selling price (ASP) by 39% will not be sufficient to offset continuous cost escalations in subsequent months (Exhibit 5). Besides, rising electricity bills, which are revised on higher frequency, will definitely create a timing mismatch to cushion Acibadem’s margins. Hence, we are doubtful of IHH’s guidance of maintaining its 2QFY22 EBITDA margin of 18.5% in subsequent quarters.

• Apex expands operations amid drug shortages. Apex is benefiting from elevated flu cases in Malaysia and Singapore (Exhibit 6 & 7) and Omicron has become a community respiratory illness, which created drug shortages (mainly fever, cough and cold syrups) especially in Malaysia since end of 1Q2022 (Exhibit 8). Despite the government releasing the federal medicine stockpile to private hospitals and clinics, Apex guided that the drug inventories in private sector remain tight. This bodes well for Apex in the near term as the company is positioned to ride on the strong demand for pharmaceutical and consumer healthcare products with its ongoing expansion plans. These are: (a) 36% increase of tablets/capsules annual capacity in 2H2022 and (b) doubling the cough/cold syrup annual capacity in 3QFY22F.

• Top pick is Apex Healthcare. We continue to like Apex given the company has been enjoying strong growth over the past 20 years with decent earnings CAGR 10% underpinned by stable margins. This is anchored by several positive long-term developments like (a) an ageing population (Exhibit 9 & 10), (b) increasing public health education advancement, and (c) increasing healthcare expenditure in Malaysia and Singapore. In the near term, Apex is set to benefit from rising flu cases and Covid-19 transitioning to endemic status. 
  Furthermore, Apex is able to exhibit business resilience by delivering revenue growth during the tough pandemic period and now holds a strong net cash position of RM130mil, representing a significant 8.5% of its market cap.

Source: AmInvest Research - 15 Sept 2022