9MFY20 Core Net Profit (CNP) of RM344m (-46% YoY) came in at 53%/62% of our/consensus full-year forecasts. We consider the results to be within our expectation in anticipation of further earnings recovery following strong rebound in occupancy rates on the back of the gradual reopening of markets which IHH operates in. Looking at the 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. We maintain our SoP-TP of RM4.56. Reiterate UP.

Key results’ highlights. QoQ, 3QFY20 headline revenue and EBITDA rebounded from a low base in 2QFY20 by 37% and 210%, respectively, due to rebound in occupancy rates following easing of travel restrictions and lockdowns. Specifically, Turkey showed a strong recovery as lockdowns eased markedly. Similarly, EBITDA increased across the board led by strong rebound in inpatient admissions. Overall inpatient admission rose across the board including Singapore (+26%), Malaysia (+37%), India (+37%) and Acibadem (+27%). This brings 3QFY20 Core Net Profit (CNP) to RM234m compared to a core net loss of RM84m 2QFY20 due to narrower losses at India (3QFY20 core net loss at RM28m compared to 2QFY20 of RM156m).

YoY, 9MFY20 revenue and EBITDA decreased 13% and 24%, respectively, due to the pandemic as patients postponed non-urgent and non-essential treatment and visits to hospitals and healthcare facilities (primarily in 2QFY20). 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 (-21%), Malaysia (-25%), India (-28%) and Acibadem (- 17%). This brings 9MFY20 CNP to RM344m (-46%) (excluding an impairment on the remaining goodwill of RM400.5m from an investment made into Global Hospitals in India) due to widening losses in India.

Outlook. The group has undertaken cost initiatives measures to defer non-essential capex and opex to mitigate any revenue shortfall. The Group took pro-active initiatives to partially mitigate the effects of lower patient volumes by improving case-mix and diversifying into new revenue streams by providing COVID-19 screening services. COVID-19 related services contributed about 10%, 3% and 21% of the 3QFY20 revenues in Singapore, Turkey and India, respectively. The Group has also entered into an agreement to dispose its 50% interest in Apollo Gleneagles Hospital Limited, a joint venture, and the disposal is expected to be completed by 15 December 2020.Thus far, the group has further deleveraged its non-lira debt in its Turkish operations from EUR288m as at Dec 2019 to EUR92m as at Sept 2020. Looking at the 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. We maintain our SoP-TP of RM4.56. The stock is trading at rich valuations of 78x and 54x on FY20E and FY21E EPS, respectively, compared to expected earnings 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 - 27 Nov 2020