Following our recent meeting with IHH, we reaffirm our positive outlook on the group given a more stabilised earnings from Acibadem and improving performance at Gleneagles Hong Kong (GHK). Meanwhile, we believe the impact of Lira fluctuation has a less profound impact on the group due to natural hedging. Maintain Outperform call with an unchanged SOTP based TP of RM7.50, based on 2-year forward average EBITDA. On a side note, IHH is expected to announce its 4QFY21 result on 23 February 2022.
- Impact on Lira depreciation. Depreciation of Turkish Lira has raised concern among investors over its impact on IHH’s profitability. The impact is expected to be manageable as IHH has a natural hedge against Lira volatility, where 40% of Acibadem’s revenue is denominated in non-Lira currencies due to its exposure in Europe (28%) as well as revenue derived from foreign patients (12%). IHH is expected to invest more in the European marketto increase its natural hedging position, suggesting that its non-Lira revenue would expand further in the future. On top of that, 95% of its non-Lira debt is hedged using cross currency swap. As such we expect a more stabilised earnings from Acibadem. High inflationary pressure in Turkey has also raised concern on margin erosion. Nevertheless, the group has been able to pass through the increase in cost to (not theirs or they, always “it or its”!!) patients. This is because Acibadem’s patients are generally more affluent and have mostly dollarized their assets, hence they are less susceptible to the fluctuation in local currency.
- GHK is expected to breakeven at net profit level in FY23F. GHK is expected to continue contributing positively to EBITDA with occupancy rate maintaining at c.60%. However, as GHK expand its Hong Kong University (HKU) professional clinics and allowing its doctors to bring in private patients to GHK, we believe this would help to increase the occupancy rate. Given an improving utilisation, GHK should achieve breakeven at net profit level in FY23F.
- Divestment of China unit. Management has guided that the potential divestment of China operations does not include GHK and it is not likely to be a complete divestment as reported in the news. IHH plans to pare down its current stakeholding of 70% by collaborating with a local partner without compromising its controlling power. The group will be targeting mid to upper mid-level income patient in China.
Source: PublicInvest Research - 9 Feb 2022