1QFY20 Core Net Profit (CNP) of RM189.4m (+1% YoY) came in at 18%/24% of our/consensus full-year forecasts. We consider the results to be within our expectation as 2H is normally better than 1H. With the re-opening of economies, the group expect subsequent quarters to show marked improvement. Looking at performance of its 62%-owned Continental Hospitals and 74%-owned Global Hospitals acquired back in 2015 where EBITDA is hardly positive, India is seen as a tough operating environment. SoP-TP is RM4.70. Reiterate UP.

Key results’ highlights. QoQ, 1QFY20 revenue and EBITDA fell 7% and 19% respectively due to the pandemic. EBITDA decreased due to lower contribution from Parkway Pantai (Malaysia, Singapore and India) and Acibadem due to lower inpatient admission volume. Overall inpatient admission fell across the board led by Singapore (-12%), Malaysia (-13%), India (-8%) and Acibadem (-3%). This brings 1QFY20 CNP lower by 35% due to lower contribution from Malaysia, Singapore and India.

YoY, 1QFY20 revenue and EBITDA decreased 2% and 10%, respectively, due to the pandemic as patients postponed non-urgent and non-essential treatment and visits to hospitals and healthcare facilities. The Group also saw a decrease in foreign patient volume especially from March 2020 onwards due to the various travel restrictions implemented across the countries that it operates in. Overall, inpatient admission fell across the board including Singapore (- 10%), Malaysia (-4%), India (-3%) and Acibadem (-4%). Headline LATAMI of RM319.8m recorded as the Group undertook a thorough portfolio review of the non-Fortis investment made in 2015 and a) Impairment on the remaining goodwill of RM400.5m from an investment made into Global Hospitals in India; and b) Realisation of RM60m foreign currency translation losses relating to Khubchandani Hospitals in India upon substantive liquidation. However, 1QFY20 CNP (+1%) was marginally higher due to associates returning from profitability compared to losses in 1QFY19.

Outlook. The group has undertaken cost initiatives measures to defer non-essential capex and opex to mitigate any revenue shortfall. With the re-opening of economies, the group expect subsequent quarters to show marked improvement. Due to the COVID-19 pandemic, the opening of Parkway Shanghai has been postponed to 2021. Thus far the group has further deleveraged its non-lira debt in its Turkish operations from EUR267m as at Dec 2019 to EUR183m as at Mar 2020. Looking at IHH’s performance in 62%-owned Continental Hospitals and 74%-owned Global Hospitals acquired back in 2015 where EBITDA is hardly positive, India is seen as a tough operating environment. We are concerned over issues at Fortis, including an auditor’s qualified audit report in FY19, potential risk of provisions, lapses in internal controls leading to regulatory probing, which could well mean execution risk.

Maintain UP. TP is RM4.70 based on SoP valuation, implying 39x FY20E EPS. The stock is trading at rich valuations of 49x and 47x on FY20E and FY21E EPS, respectively, compared to growth averaging 8% each over the next two years.

Key risk to our call is faster-than-expected ramp-up in new hospitals.

Source: Kenanga Research - 30 Jun 2020