• IHH Healthcare saw an uneven recovery in patient volume admission as COVID-19-related contributions moderated as expected.
• Acibadem’s solid domestic performance was dented by its hyper-inflationary environment as earnings were curtailed. This confluence of factors dragged on earnings, below our expectations. However, eventual admission recovery should support its earnings going forward.
• Maintain BUY with a target price of RM7.10.

IHH Healthcare's 2Q22 Below Our Estimate But Within Consensus Expectations

• IHH Healthcare’s 2Q22 core profit of RM318m contracted 22.1% y-o-y (-31.5% q-o-q). It brought 1H22 core profit to RM725m (-9.3% y-o-y). It is below our estimate but within consensus full-year estimates at 42% and 45% of full-year earnings respectively.
• The negative variance is hyper-inflationary conditions weighing more than expected on Acibadem’s contributions and shortfall in inpatient admission recovery to offset moderating COVID-19-related contributions.

Malaysia Almost Back to Pre-pandemic Levels as Moderating COVID-19 Contributions Weigh on Singapore

• Singapore operations’ top-line was flattish at 0.8% y-o-y. This was amid flattish inpatient admission (-0.7% y-o-y) but higher revenue intensity (+21.9% y-o-y) attributed to better case mix with a higher proportion of acute patients seeking treatment. Inpatient admission remains 20% below pre-pandemic levels. The tapering of COVID-19- related revenue to 5% of revenue (1Q22: 22%) was a contributing factor to flattish revenue. EBITDA earnings contracted 6.0% y-o-y off lower margins.
• In contrast, Malaysia continues to realise a swift recovery in inpatient admission (+31.2% y-o-y). The higher elective case mix diluted revenue intensity (-7.1% y-o-y) as COVID-19 contributions moderated to 3% revenue (from 8% in 1Q22). EBITDA earnings grew 20% y-o-y off enhanced margins from the positive operating leverage.

Solid Domestic Performance But Hyper-inflation Translation Weighs on Acibadem’s Contributions

• Meanwhile, Acibadem’s revenue was flattish (+0.2% y-o-y) as patient volume (+11%) and revenue intensity in ringgit terms (+16% y-o-y, in local currency terms: +46%) grew. However due to the hyper-inflationary environment, earnings in ringgit terms contracted by 35%. Acibadem’s operations contributed between 25-30% of EBITDA earnings previously.
• Meanwhile in India, absence of COVID-19-related contributions weighed on revenue (-2.0% y-o-y) despite registering positive inpatient volume (21.7% y-o-y).

IHH Healthcare - Earnings Forecast Revision and Recommendation

• We cut our 2022-24 earnings forecasts for IHH Healthcare by 12/7/10% to account for lower patient volume admission and Acibadem contributions.
• Maintain BUY recommendation on IHH Healthcare with a lower SOTP-based target price of RM7.10 (from RM7.30). SOTP-based equity value of RM61,884mil consists of
  • Parkway Pantai Limited (100% equity stake): RM39,846mil.
  • Acibadem (90% equity stake): RM11,259mil.
  • Fortis (31.1% equity stake): RM6,424mil.
  • IMU Health (100% equity stake): RM1,509mil.
  • Parkway Life REIT (SGX:C2PU) (35.7% equity stake): RM2,846mil.
• Our SOTP-based target price implies 37.4x 2022F P/E, or close to its -1 standard deviation of its 5-year mean P/E.

• Valuations appear attractive with:
  • resilient yet defensive 3-year earnings (2021-24F) CAGR of 4.2%, and
  • IHH Healthcare’s sound track record. The attractive valuation outweigh the hyper-inflationary risks associated with Acibadem.
• Key downside risks are:
  • execution risk,
  • shortfall in turning around Fortis, and
  • heightened regulatory hurdles.

Source: UOB Kay Hian Research - 26 Aug 2022