IHH Healthcare (IHH) reported a weak set of results: 1Q20 core net profit fell by 12% yoy to RM177m on lower revenue (-2% yoy) and higher operating expenses (ie, staff cost), partly cushioned by lower taxation. In addition, the group has also booked a RM401m impairment charge on the remaining goodwill from its investment in Global Hospitals in India. The impairment, along with other exceptional items, led to a RM320m headline net loss in 1Q20. The results were below market and our expectations. Management believes the worst is over (in April and May 2020) and foresees a gradual recovery in patient arrivals. We cut our 2020 earnings forecast by 7% to incorporate the weak 1Q20 results and lower patient arrivals for 2Q20, while keeping our 2021-22E earnings unchanged. Maintain HOLD with an unchanged price target of RM5.70.

1Q20 Core Net Profit Fell by 12% Yoy

IHH’s 1Q20 core net profit fell by 12% yoy to RM177.3m due to lower revenue (-2.4% yoy) and higher costs (ie, staff costs, inventories and consumables, depreciation), partly cushioned by lower taxation. The group has recognised RM517m of exceptional losses (including RM401m impairment of goodwill), resulting in a headline net loss of RM319.8m for 1Q20 (from RM89.5m net profit in 1Q19). IHH’s 1Q20 core net profit accounted for 23% of street and 25% of our full-year earnings forecasts. We deemed the results as below expectations, in anticipation of further weakness in its 2Q20 results due to lockdowns in its operating countries.

We Expect Earnings to Weaken Further in 2Q20

IHH’s earnings should weaken further in 2Q20 due to lower in-patient arrivals and a decline in procedures performed, given: (i) the closure of countries’ borders has restricted the inflow of foreign patients. Pre-Covid- 19, the foreign patients accounted for 6% / 10% / 13-15% / 25% of its revenue in Malaysia, Fortis, Acibadem and Singapore respectively; (ii) a scale down in business operations whereby IHH defers the elective and semi-elective procedures to reduce traffic into its hospitals; (iii) cautious sentiment; and (iv) the lockdowns in its operating countries have discouraged the patients to travel inter-state for medical treatments. Nonetheless, management believes that IHH has seen the worst in AprilMay 2020; in June, management has seen some recovery in patient arrivals

Source: Affin Hwang Research - 30 Jun 2020