We attended IHH’s 4Q21 results briefing and management has cautioned mounting short-term headwinds arising from the tapering of Covid-19 related services, as well as inflationary pressures. The loss of Covid-19 related revenue will be replaced by the recovery in non-Covid services as its key markets return to normalcy. However, we highlight that there could potentially be a 1-2 quarters lag, due to the sharper fall in Covid-19 related services. That said, management remains committed to mitigate the headwinds by (i) cost savings measure along with (ii) an appropriate pricing adjustment. We keep our BUY rating on IHH, with an unchanged TP of RM7.75, as we still like IHH for its refreshed strategy to drive long-term sustainable growth, despite the short-term headwinds.

Inflationary pressure. With the recent cost inflations, we expect margins to come under pressure for IHH. However, management remains committed to mitigate this impact via its group procurement strategy and aims to generate savings of RM100m in FY22. Staff costs are also expected to trend higher due to (i) medical wage inflation, and (ii) the need for a larger workforce. The latter is due to the return of more non Covid related services as IHH’s key markets return to normalcy, and more clinical staffs are required to serve patients.

Price adjustment. Given the cost pressure, management would also likely make necessary and appropriate adjustment to its pricing in a well-considered manner, to protect the sustainability of the business. As for its Turkish operations, due to the high inflationary situation, Acibadem has made a price adjustment of c.33% (on a blended basis). Despite the increase in pricing, demand has remained sticky and bed occupancy remained high. The upward revision in pricing is less likely to affect Acibadem’s patient volumes in our view, as Acibadem typically serves the ultra-high net worth.

Singapore. Overall performance for Singapore remained resilient in 4Q21, despite the lower patient admissions (-3% QoQ), given the spike in Covid-19 cases in the local community. Revenue per inpatient was stronger, due to the handling of more acute Covid-19 cases. However, as the market moves into an endemic phase, Covid-19 services are expected to fall-off in the next two quarters. We note that on-arrival PCR testing in Singapore has been replaced by rapid antigen test in 1Q22. Barring any further variants, management also expects Covid admission to taper off in 1H22 as the Omicron wave peaks and wane. While the void created will be replaced by the return of non-Covid related services, however given the sharp drop in Covid-19 services rendered, normalisation could potentially only materialise in 2H22.

Growing and freeing capacity. Given the land constraint in establishing new hospitals in Singapore, IHH is exploring to grow its operations via the ambulatory care centre (ACC) model, whereby the facility will offer clinical care and day surgeries, mainly providing services on an outpatient basis. This model can help to free up existing hospital beds and redirect the use for inpatients, which commands higher revenue intensity. On a side note, both Acibadem Atasehir (+180 beds) and Parkway Shanghai (+450 beds) are slated to open in 3Q22.

Forecast. Unchanged.

Maintain BUY, TP: RM7.75. We reiterate our BUY rating on IHH, with an unchanged TP of RM7.75, despite the short-term headwinds faced, as we continue to like IHH for its refreshed strategy that will support sustainable growth over the longer term.

Source: Hong Leong Investment Bank Research - 25 Feb 2022