Maintain Neutral. The bright spot is IHH Healthcare which has shown strong earnings recovery due to a turnaround into profitability underpinned by both its India operation and Acibadem which continued to show signs of faster-than-expected recovery, registering their fourth consecutive quarterly profits in 3QFY21. 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. However, the sharp price run-up looks to have rendered current valuations fairly-valued, 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. Our calls are as follow: IHH (Market Perform; TP: RM6.65) and KPJ (MP; TP: RM1.01) and Pharmaniaga (MP; TP: RM0.74).

India and Turkey are turning around, providing booster for IHH. We highlight that India and Acibadem continued to post strong commendable bottom-line performances in 3QFY21, and Hong Kong Gleneagles has turned EBITDA breakeven in May 2021. Overall, 3QFY21 continued to show sequential topline improvement due to easing of travel restrictions and lockdowns as patients including elective cases gradually returned to the group’s hospitals but this was negated by a sharp decrease of COVID-19-related revenue in India, which outstripped the higher revenues from COVID-19-related services rendered in other markets. COVID-19-related services contributed about between 6%- 29% to 3QFY21 (2QFY21: 12%-31%) revenues from the Group’s operations in its home markets. Revenue per inpatient admission rose in Malaysia (+7%) and India (+17%) but lower in Singapore (+6%), and flat in Acibadem. Inpatient admission rose in India (+21%), Acibdem (+2%) and Singapore (+2%) but lower in Malaysia (-2%). Although patient volume is impacted by the resurgence of COVID-19 cases across the globe and by the various movement restrictions implemented, the Group’s diversified earnings base across 10 markets provides resilience with key markets 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 by providing COVID- 19 screening services. We highlight that foreign patient revenues at the Group’s hospitals in Turkey have exceeded pre-COVID- 19 levels since 4QFY20 after Turkey reopened its borders on June 2020. In India, the group will continue to drive cost savings and ramp up productivity and increase bed occupancy ratio currently averaging at 60%.

Pharmaniaga’s outlook. Despite recording bumper profits in 3QFY21, we do not expect sequential 4QFY21 net profit growth since most of the vaccines delivery were completed in 3QCY21. The majority of Sinovac recipients received their second dose between June and September. As such, the requirement for a booster shot will could potentially start from December onwards. Pharmaniaga had previously supplied more than 22m doses of Sinovac vaccine to MOH and the private sector and is ready to supply up to 10m doses. Thus, there are about 11m Sinovac recipients requiring the booster shot. The group is currently in talks with Sinovac Biotech to supply vaccines to neighbouring countries via their fill-and-finish facility. We understand that Malaysia is one of five countries (including Turkey, Brazil, Egypt, and Indonesia) outside of China that has been authorised to conduct fill-and-finish for Sinovac. Specifically, Pharmaniaga marked its maiden entrance into the vaccine international market by successfully exporting the first batch of Sinovac filled-and-finish Covid-19 vaccine to Myanmar with an initial order of 200,000 doses. We highlight that earnings visibility could also come from the possibility that Sinovac vaccines would be approved as booster shots and for adolescent use, likely in 1H 2022. We have factored in concession extension beyond the interim extended concession period from 1st Dec 2019 to 31st Dec 2021 for procurement of drugs to ensure no supply chain disruption in the supply and distribution of medicines nationwide in view of Pharmaniaga’s infrastructure setup via a computerised system i.e. Pharmacy Information System (PHIS) which is an integral role in ensuring the distribution of drugs to patients and effective management of stock levels. The group highlight that a series of discussions and negotiations for the renewal of the concession has been carried out and the outcome is looking positive. We lower our TP from RM0.85 to RM0.74 based on 13x FY22E EPS (-0.5SD below its 5-year historical forward mean). We lower our PER from 15x to 13x to reflect lower sequential earnings growth ahead. Maintain MP.

KPJ’s lack of re-rating catalyst, 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 currently under gestation period could continue to drag overall earnings. Although price has fallen to seemingly attractive levels at mean PE, catalysts are lacking and it may take longer to outperform.

Source: Kenanga Research - 27 Dec 2021