• Strong 3Q20 core net profit of RM234m (+18% yoy), driven by sharp revenue recoveries across all countries, tightened cost controls and receipt of government reliefs and grants.
• The 3Q20 results beat our expectations on better-than-expected profit margins; the results were however within consensus forecasts.
• We lifted our 2020-22E EPS forecasts by 9-50% after raising our profit margin assumptions for its key markets, taking into consideration IHH’s good cost discipline and strong pricing powers. In tandem, we raised our price target to RM6.10. Maintain HOLD due to limited share price upside.

Strong 3Q20 profit on revenue recovery, cost control and government grants

IHH reported a strong 3Q20 core net profit of RM234m (+18% yoy), a sharp rebound from a RM84m core net loss in 2Q20, driven by higher revenue (+37% qoq), tight cost controls and the receipts of grants / reliefs from the Singapore government. In particular, the revenue and EBITDA from Central & Eastern Europe (CEE) and India has rebounded strongly.

• Singapore (revenue at RM1bn, +24% qoq / -8% yoy): Local patients have returned since Jun20 but the foreign patients have yet to return. Singapore operations registered robust 3Q20 EBITDA of RM351m (+56% qoq, -2% yoy), partly supported by government reliefs and grants;
• Malaysia (revenue at RM556m, +28% qoq / -8% yoy): Average occupancy has recovered to around 50%, EBITDA grew by 114% qoq to RM154m (-13% yoy);
• CEE (revenue at RM923m, +50% qoq / +1% yoy): strong recovery in both domestic and foreign patients after the lifting of border control in Jun20. EBITDA tripled qoq to RM224m (+20% yoy);
• India (revenue at RM694m, +67% qoq / -21% yoy): higher revenue driven by the return of local patients as well as treatment of Covid-19 patients. EBITDA swung from RM74m losses in 2Q20 to a profit of RM90m (-29% yoy).

9M20 core net profit of RM344m (-46% yoy) was above our expectations

Cumulatively, IHH’s 9M20 core net profit fell by 46% yoy to RM343.6m due to a weak 2Q20 earnings where operations were affected by Covid-19 and lockdowns. Nonetheless, the revenue has rebounded strongly in 3Q20 and its tightened cost controls and strong pricing power has lifted 3Q profitability. As a result, the 9M20 earnings came in ahead of our expectations (9M20 profit at 91% of our prior full year earnings forecasts). The results were however within market expectations.

Raising 2020-22E EPS by 9-50%, lifting price target to RM6.10

While IHH’s revenue was largely within our expectations, its EBITDA margin was ahead of our forecasts due to stringent cost controls, strong pricing powers and better than expected margins for treatment of Covid-19 patients. As such, we raised our 2020-22E earnings forecasts by 9-50% after incorporating the strong 3Q20 results and lifted our profit margins forecasts for the Singapore, India, CEE and North Asia operations. In tandem with our earnings upgrade, we have lifted our DCF-derived 12- month price target to RM6.10 (from RM5.80).

Maintain HOLD

Maintain HOLD. While 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, its valuation of 54x 2021E PER has largely reflected these positives, we believe. Key upside risks: (i) better-than-expected operational performance; and (ii) higher earnings recoveries. Downside risks are major earnings disappointments and unforeseen country / forex risks.

Source: Affin Hwang Research - 27 Nov 2020