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 its fifth consecutive quarterly profits in 4QFY21. 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 on 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), KPJ (MP; TP: RM1.04) and Pharmaniaga (MP; TP: RM0.77).

India and Turkey are turning around, providing booster for IHH. We highlight that India and Acibadem have continued to post strong commendable bottom-line performances in 4QFY21, and Hong Kong Gleneagles has turned EBITDA breakeven in 2021. Overall, 4QFY21 continued to show sequential top-line improvement due to easing of travel restrictions and lockdowns as patients including elective cases gradually returned to the group’s hospitals as shown by recovery of patient volumes but this was negated by a sharp decrease of COVID-19-related revenue across all markets offset by a lower base in Malaysia due to movement restriction in 3QFY21. COVID-19 related services contributed between 6%-29% to 4QFY21 (3QFY21: 6%-29%) revenues from the Group’s operations in its home markets. Revenue per inpatient admission rose in Singapore (+11%), Acibadem (+3%) and India (+1%) but was lower in Malaysia (-9%). Inpatient admission rose in Malaysia (+18%), India (+1%), Acibadem (+11%) but declined in Singapore (-3%). 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 are positive on IHH recently announced corporate development to buy entire 100% stake in Ramsay Sime Darby Health Care Sdn Bhd (Ramsay Sime Darby) since Ramsay Sime Darby have a stable of strategic private hospitals in the Klang Valley which is expected to enable IHH to leverage on its wide network of hospitals to deliver potential synergies and offerings. Based on the indicative Enterprise Value (EV) of RM5.67b, the valuation works out to EV/EBITDA of 25x on FYE Jun 2021 EBITDA of RM226m which is lower than the recent transaction where GIC Private Limited paid for a stake in Sunway Healthcare at 31.3x.

Pharmaniaga’s outlook. Despite recording bumper profits in 4QFY21, we do not expect sequential net profit growth going forward since most of the vaccines delivery has been completed. The majority of Sinovac recipients has received their second dose and as such, the requirement for a booster shot could provide earnings visibility in subsequent quarters. 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. Leveraging on the experience and expertise in manufacturing fill-and-finish the Sinovac COVID-19 vaccine, the Group intends to export the vaccine to countries such as Indonesia, Philippines, Cambodia, Thailand and several African nations that are facing vaccine supply shortages. Pharmaniaga is actively negotiating with Sinovac Biotech Ltd to secure a deal to allow the Group to speed up the supply of vaccines to these countries. With its proven track record in vaccine management and wide distribution channels, the Group is optimistic that it will be able to secure the deal. In Indonesia, moving forward, the Group is optimistic in improving its profitability. This came on the back of the successful reorganisation of its business operations to enhance operational efficiency. These include the appointment of a local Indonesian as President Komisari to strategise its logistics arm in Jakarta and Local President Director for its manufacturing arm in Bandung.

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 on 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 which are currently under gestation period could continue to drag overall earnings. Although its share price has fallen to seemingly attractive levels at mean PER, catalysts are lacking and it may take longer to perform.

Source: Kenanga Research - 6 Apr 2022