Maintain Neutral. The bright spot is IHH Healthcare which is set for strong earnings recovery in FY22, underpinned by both its India operation and Acibadem showing signs of faster-than-expected recovery, registering their second consecutive quarterly profits in 1QFY21. Elsewhere, pent-up demand and ramp-up of the CEE (Central Eastern Europe) region business coupled with de-leveraging of non-LIRA debt exposure has also alleviated the finance cost of Acibadem. Meanwhile, Pharmaniaga’s 1QFY21 results returned to the black. However, the sharp price run-up looks to have rendered current valuations unattractive, which seem to have over-priced the positive near-term prospects. 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. Maintain OP on IHH, MP on KPJ and UP on Pharmaniaga.

India and Turkey are turning around, providing booster for IHH. We raise out SOP-TP for IHH from RM6.05 to RM6.30 as we raised our EV/Ebitda assumption for Acibadem from 19x to 20x due to the improving outlook there. We highlight that in 1QFY21, India and Acibadem registered their second consecutive quarterly profits Although patient volume was impacted by COVID-19 cases and by the various movement restrictions, the Group’s diversified earnings base across 10 markets provides more resilience as key markets are at different phases of the COVID-19 pandemic. The Group took pro-active 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 between 5% and 17% of 1QFY21 revenues from the Group’s operations in its home markets. In Malaysia, the Group’s hospitals will allocate approximately 10% of bed capacity to treat COVID-19 patients and in May, that was increased to 13% with also more than doubling of ICU beds committed for COVID-19 patients. We highlight that foreign patient revenue at the Group’s hospitals in Turkey have exceeded pre-COVID-19 levels since 4QFY20 after Turkey re-opened its borders on June 2020. The group is hopeful and targeting EBITDA breakeven in Gleneagles HK. In India, the group will continue to drive cost savings and ramp up productivity and increase bed occupancy ratio currently averaging at 60%. In India, specifically, non-COVID-19 related activities saw month-on-month recovery on inpatient admission.

Pharmaniaga’s earnings visibility cloudy beyond Dec 2021. Pharmaniaga’s 1QFY21 result returned to the black. However, we consider the results to be within expectation due to its erratic performance over the past eight quarters or two FYs where 2H earnings only accounted for <30% of full-year earnings. Pharmaniaga has entered into an agreement for the purchase and distribution of Covid-19 vaccine developed by Sinovac Life Sciences Company Limited, a factor we believe has already been priced in its share price. The agreement is for the supply of Covid-19 vaccine to be carried out through the fill and finish activity. Its balance sheet for the latest quarter revealed a near doubling of receivables from RM288m to RM545m which management attributed to pending collection for the advanced payment of Covid-19 vaccine of RM101m which was received in April. Hence, the Sinovac vaccine distribution is expected to impact from 2QFY21 onwards but it is unclear at this stage as to the profitability of such a venture, mindful that the government will likely want to see it delivered in the most price-competitive manner possible. We highlight here that PBT margin for Logistics & Distribution segment is razor-thin, averaging at 0.2% over the past 20 quarters. The recent run-up in its share price may have been due to the earlier expectations of it being involved with the Sinovac vaccine distribution. For illustration purposes, assuming 12m dosses, USD13.60/dose and a net profit margin of 2% which works out to a net profit of approximately RM13m over the next two years, the impact is approximately 14% each of our FY21E and FY22E net profit forecasts. Hence, the sharp price run up looks to have rendered current valuations unattractive, which seem to have overpriced the positive near-term prospects. Furthermore, the stock lacks earnings visibility beyond the interim extended concession period from 1st Dec 2019 to 31st Dec 2021 for procurement of drugs which is to ensure no supply chain disruption in the supply and distribution of medicines nationwide while an open tender and appointment of a new concessionaire is developed.

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. The current rise in infection rates locally and subsequent movement control measures implemented to curb the spread COVID-19 over the next few months create a challenging environment. The Group will continue to take advantage of Governments’ incentives in order to mitigate the adverse effects of the pandemic. However, its new hospitals such as KPJ Bandar Dato’ Onn, KPJ Batu Pahat, KPJ Perlis and KPJ Miri under gestation period could continue to drag overall earnings.

Source: Kenanga Research - 2 Jul 2021