We upgrade the sector from UNDERWEIGHT to NEUTRAL rating largely due to our Outperform call on IHH Healthcare. IHH is set for earnings recovery in FY22 underpinned by its India operation and Acibadem (Turkey) showing signs of a faster-than-expected recovery with both markets registering profits in 4QFY20. Elsewhere, pent-up demand and ramp-up of the CEE (Central Eastern Europe) region business coupled with deleveraging of non-LIRA debt exposure has alleviated finance cost for Acibadem. Pharmaniaga’s 4QFY20 result came in below expectations due to lower-than-expected concession demand. KPJ’s lack of re-rating catalyst and new hospitals under gestation period could continue to be a drag to earnings; hence, we reiterate our Market Perform call. For stock pick, we prefer IHH on these merits; (i) solid captive markets in growth locations, (ii) commanding market positions specifically in Singapore, Malaysia and Turkey, and (iii) a strong management.

India and Turkey are turning around, providing boost for IHH. With the gradual easing of local movement restrictions starting in June 2020, the Group has seen local patient volumes recover and occupancy rising to between 45%-75%. Occupancies at the Group’s hospitals in Malaysia and Singapore recovered to about 64% and 85% of preCOVID-19 levels in 4QFY20, respectively. The Group took proactive initiatives to partially mitigate the effects of lower patient volumes by improving case-mix and providing COVID-19 screening services. COVID-19-related services contributed about 11%, 12% and 21% of the 4QFY20 revenues in Singapore, CEE and India, respectively. In Malaysia, the Group’s hospitals will allocate approximately 10% of bed capacity to treat COVID-19 patients and have also taken in non-COVID-19 patients decanted from public hospitals, and will be setting aside about 200 beds for this purpose. We highlight that foreign patient revenue at the Group’s hospitals in Turkey exceeded pre-COVID-19 levels in 4QFY20 after Turkey reopened its borders on June 2020. Thus far, the group has further deleveraged its non-lira debt in its Turkish operations from EUR288m as at Dec 2019 to EUR37m as at Dec 2020. The group is targeting EBITDA break-even in Gleneagles HK. In India, the group will continue to drive cost savings and ramp up productivity and capacity to increase bed occupancy ratio currently averaging 60%. In India, specifically, non-COVID-related activities saw month-on-month recovery on inpatient admission. IHH guided that it will strive to contain costs for Gleneagles Chengdu while Parkway Shanghai is expected to open in end-2021 or early 2022.

Pharmaniaga’s earnings visibility cloudy beyond Dec 2021. Its wholly-owned Pharmaniaga Lifescience Sdn Bhd (PLS) has entered into a term sheet agreement with the Government of Malaysia for the purchase and distribution of Covid-19 vaccine developed by Sinovac Life Sciences Company Limited (subsidiary of Sinovac Biotech Ltd). The agreement enables PLS to supply 12m doses of finished Covid-19 CORONAVAC, SARS-COV-2 Vaccine (Vero Cell) Inactivated (developed by SINOVAC LS), and fill-and-finished activity in PLS, to be delivered to hospitals, clinics and any other facilities nationwide as instructed by Ministry of Health of Malaysia (MOH). However, we caution that it is unclear at this stage as to the financial impact as no guidance were given for now in terms of pricing and margins and we are also mindful that the government will likely want to see it delivered in the most competitive manner as possible. We also like to stress here that PBT margin for Logistics & Distribution segment of which the distribution of the vaccine is expected to fall under is razor-thin, averaging at 0.5% over the past 20 quarters. The share price has risen sharply since 3Q 2020, propelled by market-talk then that Pharmaniaga would be selected to package the Covid-19 vaccine, which seems to have over priced the near-term prospects The Government has agreed to provide a 25-month interim period for procurement of drugs to Pharmaniaga after its concession ends on 30th Nov 2019. The interim period from 1st Dec 2019 to 31st Dec 2021 is to ensure no supply chain disruption in the supply and distribution of medicines nationwide.

KPJ’s valuation appears to be attractive again, Reiterate MP. KPJ‘s lack of re-rating catalyst and new hospitals under gestation period could continue to be a drag to earnings. Looking ahead into 2021, the Group will continue to take advantage of Government’s incentives in order to mitigate the adverse effects of the pandemic. Under the PERMAI assistance package announced by the Government in January 2021, the Group has offered to collaborate with the government hospitals to treat nonCOVID-19 patients in an effort to alleviate the strain on the public healthcare system. However, the new hospitals under gestation period could continue to drag overall earnings.

Source: Kenanga Research - 5 Apr 2021