1HFY20 Core Net Profit (CNP) of RM105m (-75% YoY) came in at 10%/16% of our/consensus full-year forecasts. The result is below our expectation due to lower-than-expected inpatient volumes and higher-than-expected losses at its India operation. Looking at performance of its 62%-owned Continental Hospitals and 74%-owned Global Hospitals acquired back in 2015 where its EBITDA is hardly ever positive, India is coming across as a tough market place. Hence, we cut our FY20E/FY21E net profit by 38%/14%. Correspondingly, our SoP-TP is cut from RM4.70 to RM4.56. Reiterate UP.

Key results’ highlights. QoQ, 2QFY20 headline revenue and EBITDA fell 28% and 64%, 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 including Singapore (-25%), Malaysia (-40%), India (-43%) and Acibadem (-36%). This brings 2QFY20 Core Net Loss (CNL) to RM84m compared to a profit of RM189m in 1QFY20 due to lower EBITDA across the board and further exacerbated by losses at Acibadem (2QFY20 loss of RM71m compared to a profit of RM12m in 1QFY20).

YoY, 1HFY20 revenue and EBITDA decreased 16% and 37%, 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 (-22%), Malaysia (-23%), India (- 25%) and Acibadem (-19%). This brings 1HFY20 CNP to RM105m (excluding Impairment on the remaining goodwill of RM400.5m from an investment made into Global Hospitals in India) due to widening losses at India and substantially lower contribution across the board.

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 but while we expect a stronger 2H, we do not think it will be sufficient to meet our earlier FY20E forecast. 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 EUR180m as at June 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, cut FY20E/FY21E net profit by 38%/14%. We cut our FY20E/FY21E net profit by 38%/14%. Correspondingly our SoP-TP is cut from RM4.70 to RM4.56. The stock is trading at rich valuations of 78x and 54x on FY20E and FY21E EPS, respectively, compared to growth averaging 7% each over the next two years.

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

Source: Kenanga Research - 28 Aug 2020