We attended IHH’s 1H21 results briefing and came away feeling positive on the group’s prospects going forward. 1H21 IHH’s lab services revenue amounted to RM975m in 1H21 (11.8% of total sales), which was mainly driven by Covid-19 testing. Forecasts are unchanged. We are encouraged that IHH have been able to not only compensate for lower inpatient occupancy during the pandemic but pivot towards Covid-19 testing which has helped them grow earnings. Our RM7.30 TP based on a SOP valuation methodology remains unchanged. Maintain BUY.

We attended IHH’s 1H21 results briefing and came away feeling positive on the group’s prospects going forward.

Covid-19 related revenues. IHH shared that Covid-19 related revenues in 2Q21 accounted for between 12%-31% in various markets (Figure #1). Services offered include Covid-19 lab testing, border screening, administering vaccinations and more. With regards to Covid-19 services offered, we believe that laboratory testing for Covid- 19 is the most lucrative.

Laboratory services becoming a notable part of earnings. IHH’s lab revenue amounted to RM975m in 1H21 (11.8% of total sales). While we understand lab revenues are derived from various tests, we believe that profitability in lab revenues going forward will be driven by Covid-19 testing. We believe that increased 2Q21 profitability (core PATAMI grew +36.5% QoQ) was partially attributed to increased number of Covid-19 tests conducted. With over 420 labs in India (via Fortis), India is the largest contributor to lab services by country, followed by Singapore. Note that the number of Covid-19 tests conducted by IHH in 2Q21 accounted for 36.7% of the total cumulative tests since 2020. IHH guided that laboratory services EBITDA margins are significantly above 25%.

Hospital operational updates. Acibadem’s revenue contribution continues to diversify into non-lira contributions. IHH shared that 40% of their Acibadem revenue now comes from non-Lira currencies (1H21: 12% foreign patients in Turkey, 28% European operations) up from 28% in FY17 (10% foreign patients in Turkey, 18% European operations). This acts as a natural hedge against the weakening Turkish Lira. IHH also shared that Gleneagles Hong Kong has achieved EBITDA breakeven in May-21. While they are still positive on operations in China, they reckon it will take longer to turn profitable. IHH’s have used comparable projects which took 4-5 years to breakeven.

Forecast. Unchanged.

Maintain BUY, TP: RM7.30. Despite Covid-19 cases rising in 3Q21 in key markets Singapore and Malaysia, we opine IHH is no longer as reliant on inpatient occupancy as some of their peers, given their Covid-19 lab testing service. We are encouraged that IHH have been able to not only compensate for lower inpatient occupancy during the pandemic but pivot towards Covid-19 testing which has helped them grow earnings. Our RM7.30 TP based on a SOP valuation methodology remains unchanged. Maintain BUY.

Source: Hong Leong Investment Bank Research - 30 Aug 2021