• 2Q20 core net loss of RM84m (vs RM189m core net profit in 1Q20) due to a sharp 28% qoq decline in revenue, attributable to scaled down operations and lower patient arrivals during the MCO / CMCO period.
• Cumulatively, 6M20 core net profit fell by 76% to RM105m due to the weak 2Q20 performance, below market and our expectations.
• Trimming 2020-22E EPS forecasts by 1-38%. Looking ahead, we expect IHH to see earnings recovery in 2H20 due to pent up demand for elective medical treatments and stronger growth in 2021 as travel restrictions ease. Maintain HOLD.

2Q20 Earnings Was Hard Hit by Covid-19 and Movement Restrictions

IHH’s 2Q20 revenue fell by 30% yoy (-28% qoq) to RM2,565m due to lower revenue across all key markets - India saw the steepest revenue decline of 49% yoy, followed by 31% decline in Central & Eastern Europe (CEE); Malaysia and Singapore reported a relatively lower 23-24% decline in revenue. The lower revenue was due to lower patient arrivals, scaled down business operations and postponement of elective procedures due to travel restrictions. Cost wise, the reduction in 2Q20 operating costs (-19% yoy) has lagged the revenue decline; this, and the high depreciation and amortisation costs (+2% yoy to RM340m) led to a core net loss of RM84m.

6M20 Core Net Profit of RM105m (-76% Yoy) Was Below Expectations

Cumulatively, IHH’s 6M20 core net profit fell by 76% yoy to RM105.1m due to the weak 2Q20 earnings. Overall, the results were below market and our expectations – IHH’s 6M20 core net profit only accounted for 16% of street and our prior full year earnings forecasts. The earnings miss was due to lower than expected revenue from the India and CEE regions. While we expect IHH’s business to improve moderately in 2H20 in anticipation of recovery in patient arrivals, the cross-border travel restrictions will continue to affect its international patients and the group will unlikely be able to recoup the large revenue losses in 2Q20.

Management Has Seen a Recovery in June

Management shared that the major impact from Covid-19 was seen in April / May when occupancy fell from 65-70% (pre-Covid-19) to 30-55%. IHH has since seen recovery from June onwards as economies reopen gradually and as domestic travel restrictions eased. Occupancy has recovered to 40-60% across its network and the group has achieved positive PATAMI by June 2020.

Cutting 2020-22E EPS by 1-38%, Lowering Price Target to RM5.50

We cut our 2020-22E earnings forecasts by 1-38% after incorporating the weak 6M20 earnings and lowering our assumptions on patient arrivals / bed occupancy, taking into consideration the prolonged closure of international borders and weakness in the India market. In tandem, we have lowered our DCF-derived 12-month price target to RM5.50 (from RM5.70).

Maintain HOLD

We maintain our HOLD rating on IHH. Notwithstanding the challenging 2020 business outlook and its weak earnings performance, we continue to like IHH for its leading position as a premium private healthcare provider with growing presence in countries where healthcare demand is underserved. The positive long-term outlook is however fairly reflected in its valuation of 62x 2021E PER, we believe. Key upside risks: (i) stronger-than-expected recovery in patient arrivals / in-patient admissions; and (ii) higher revenue intensity per patient. Downside risk is weaker-than-expected earnings due to lower in-patient admissions and high operating costs.

Source: Affin Hwang Research - 28 Aug 2020