IHH’s 1Q20 core PATMI of RM177.3m (-39.3% QoQ, -11.8% YoY). The results came in below ours (18%) and consensus’ (22%) expectations. 1Q20 was impacted by Covid-19 with lower patient volumes as they postponed non-urgent treatments and lower foreign patients. We cut our FY20-21 earnings by -20%- 27% to reflect for a more subdued outlook due to Covid-19, and also introduce FY22 numbers. We reiterate our HOLD call with lower SOP based TP of RM5.21 (from RM5.53).

Below expectations. 1Q20’s revenue of RM3.6bn (-7.3% QoQ, -2.4% YoY) brought core PATMI to RM177.3m (-39.3% QoQ, -11.8% YoY). We arrived at our core PATMI after adjusting for net EI of -RM497m (amongst others, impairment, disposal, changes in fair value and foreign exchange). The results were below both ours and consensus’ expectations at 18% and 22% respectively. The deviation was due to lower-than expected revenue contibutiion.

Dividend. No Dividends Were Declared.

QoQ. Revenue fell (-7.3% QoQ) to RM3.6bn as a result of the Covid-19 pandemic that caused lower patient volumes (patients postponed non-urgent treatments and lower foreign patients due to various travel restrictions). Inpatient admission volume fell in all segments; Singapore (-12%), Malaysia (-13%), India (-8%) and Acibadem (- 3%). Nevertheless this was partially cushioned by the increase in average revenue per inpatient in Singapore (+5%) and Acibadem (+8%). EBITDA decreased significantly (-18.5% QoQ) to RM734.4m on higher operating lease expenses (+100% QoQ). Core PATMI reduced (-11.8% QoQ) along with the increase in finance costs (+17.7% QoQ).

YoY. Revenue declined slightly (-2.4% YoY) mainly due Covid-19 that resulted to lower patient volumes (same reason as above). However, this was partially cushioned by Covid-19 related services that IHH offered, which includes; (i) screening and laboratory testing (Malaysia and Singapore), (ii) care for stable Covid-19 patients (Singapore), (iii) borders’ temperature screening (Singapore), (iv) care for walk-in Covid-19 patients (Turkey and India). EBITDA fell (-6.5% YoY) whilst margins contracted by 0.9ppts, due to the increased in operating expenses (+80.4% YoY) caused by higher cost to implement Covid-19 precautionary measures at Group’s hospitals even though it was partially mitigated by government grants and reliefs. Core PATMI followed the decrease (-11.8% YoY) despite slightly being mitigated by lower income tax (-44.0% YoY) due to higher tax expense back in 1Q19 that rose from tax on cash dividend received.

Outlook. We expect IHH’s 2Q (main hit in Apr-May) to be worse off vs 1Q given the more profound impact from Covid-19. As we understand, June saw some revival in patients scheduling treatments. As such, we are hopeful that 2H would see some recovery for IHH. Construction on Parkway Shanghai Hospital (formally known as Gleneagles Shanghai) is currently being put to halt due to Covid-19, which has postponed the scheduled opening to 2021 (previously set for 2H20).

Forecast. We lower our forecast to account for Covid-19 impact that is expected to be more profound in 2Q. Our FY20-21 earnings decrease by -20%-27%. We also introduce FY22 numbers.

Maintain HOLD, TP: RM5.21. We maintain our HOLD call. Post earnings adjustments, our SOP based TP reduced to RM5.21 (from RM5.53).

Source: Hong Leong Investment Bank Research - 30 Jun 2020