We examined new daily Covid-19 cases in IHH’s four key markets (Singapore, Malaysia, India and Turkey) and noted that all four countries had implemented some form of lockdowns in recent weeks. In addition to sluggish vaccination rates in all but Singapore, we expect in patient occupancy rate and earnings to only recover meaningfully in FY22. We lower our FY21 forecasts by 6.0% but increase our FY22 forecasts by 24.5% to account for pent up demand. After tweaking our SOP valuation methodology and accounting for changes in our forecasts, our TP rises slightly to RM5.62 from RM5.42. Maintain HOLD.

Spiking cases in key markets lead to tighter lockdown rules and lower occupancy rates. We examine IHH’s key markets Singapore, Malaysia, India and Turkey and note that new daily Covid-19 cases in all countries except Singapore have been surging rapidly (Figures #1-8). This has resulted in all four countries’ governments implementing some form of lockdown measures within the last two weeks (Figure #1-8). With lockdowns being implemented, we expect the movement of people to be limited, and hence result in lower in-patient occupancy rates, particularly in 2Q21. Looking back at 2020 as a guide, note that inpatient occupancy rates in all four territories bottomed in 2Q20 at the height of lockdown restrictions (Figures #9-12).

Sluggish vaccination rate means herd immunity will not likely be reached in 2021 in most key markets. Examining current inoculation rates, we note that with the exception of Singapore, none of IHH’s key markets are expected to reach herd immunity in 2021 at current inoculation rates (Figure #13) (source). While we understand some countries intend to accelerate their pace of vaccinations, we note that this would be a tall order given current inoculation rates. For example, Malaysia has set a target of reaching herd immunity by end-2021. However, to achieve this goal, vaccination rates would have to be increase by ~3x to 125k per day. With key markets Malaysia, India and Turkey unlikely to reach herd immunity in FY21, we expect them to continue to undergo a series of rotations between tightening and loosening of lockdown rules until herd immunity can be reached. As such, with the movement of people expected to be limited by various lockdowns, we expect in patient occupancy rates in IHH’s hospitals to continue to be sluggish, at least until end-FY21.

Privatisation rumours. A Bloomberg article recently stated that Mitsui (32.9% shareholder in IHH) is exploring a deal to take IHH private by approaching Khazanah Nasional Bhd to buy over their stake (26.0%). However, Khazanah’s MD Datuk Shahril Ridza Ridzuan has dismissed talk of Khazanah selling their stake in a recent article in TheEdge. Despite this, we note that Mitsui’s current stake is just 0.1% shy of the 33% threshold where they would be compelled to make a mandatory offer (according to Securities Commission guidelines), as such, Mitsui could decide to purchase the additional shares in the open market to trigger a mandatory offer.

Forecast. We lower our FY21 forecasts by 6.0% but increase our FY22 forecasts by 24.5% to account for recovery in inpatient occupancy rate and pent up demand (i.e. patients undergoing previously delayed treatments).

Maintain HOLD, TP: RM5.42. We expect surging Covid-19 cases in IHH’s key markets and subsequent lockdown measures to result in sluggish inpatient occupancy rates in FY21. On the other hand, we do not rule out the possibility of Mitsui making a bid to take IHH private. As such, given the risk-reward balance, we reckon a HOLD call is appropriate. After tweaking our SOP valuation methodology and accounting for changes in our forecasts, our TP rises slightly to RM5.62 from RM5.42.

Source: Hong Leong Investment Bank Research - 18 May 2021