Due to the share price outperformance, we downgrade big-cap IHH to Market Perform from Outperform since the share price has risen 31% following our upgrade after its 4QFY20 results and is now offering limited upside to our TP. The run-up in share price was due to expectations of IHH Healthcare strong earnings recovery in FY22, underpinned by both its India operation and Acibadem showing signs of faster-than-expected recovery, registering their third consecutive quarterly profits in 2QFY21. 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 current valuations are 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. Our calls are as follow: IHH (Downgrade from Outperform to Market Perform; TP: RM6.65) and KPJ (MP; TP: RM1.03) and UP for Pharmaniaga (UP; TP: RM0.54).

India and Turkey are turning around, providing booster for IHH. We downgrade IHH to Market Perform from Outperform since the share price has risen 31% since our upgrade after its 4QFY20 results and is offering limited upside to our TP. We highlight that India and Acibadem continued to post strong commendable bottom-line performances in 2QFY21 and Hong Kong Gleneagles has turned EBITDA breakeven in May 2021. However revenue intensity was solid across the board with revenue per inpatient higher in Malaysia (+30%), India (+30%), Acibadem (27%) and Singapore (+2%) as more complex cases were undertaken. Inpatient admission rose in Malaysia (+7%) and Acibadem (+3%). Although patient volume was impacted by COVID-19 cases and by the various movement restrictions, the Group’s diversified earnings base across 10 markets provide 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. 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 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 rich valuations. The Group has successfully delivered the last batch of the COVID-19 vaccine supply totalling 12.4m doses to the government on 21 July 2021. In addition, the Group has also supplied additional 2m doses to the government at the end of July 2021. Recall that in Aug 2021 the Group was awarded a combined contract purchase of additional 6m doses of fill-and-finish and imported finished product of Covid-19 vaccine to supply to the government. The group’s balance sheet for the latest quarter revealed a higher receivable amount due to sales of COVID-19 vaccines to the government, with collections received in July 2021 of approximately RM320m. In addition, higher receivables were also due to advanced payment made to the supplier on purchase of COVID-19 vaccines of close to RM120m and sales of leukaemia drugs to the government around RM90m. Hence, the Sinovac vaccine distribution is expected to impact from 2HFY21 onwards but it is unclear at this stage as to the profit impact, mindful that the government will likely want to see it delivered in the most price-competitive manner possible. The stock lacks earnings growth visibility due to uncertainty of sustainability of vaccine-driven earnings growth and despite factoring in concession extension beyond Dec 2021 to supply medicine and medical supplies for procurement of drugs, the stock is trading at rich valuation at 18x and 21x FY21E and FY22E earnings, respectively.

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 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 - 1 Oct 2021