• Excluding RM509m exceptional items, IHH Healthcare’s 1Q20 core net profit of RM189m was stable y-o-y but deemed below forecast as we expect a weaker 2Q20F.
• 1Q20 saw a broad-based decline in revenue and patient load across all markets, slightly offset by higher revenue intensity and government relief.
• While IHH Healthcare’s near-term share price could be weighed down by a lacklustre 2Q20F, we think investors should buy on weakness for longer-term recovery.

1Q20 Net Loss Hit by Exceptional Items

• IHH Healthcare’s reported 1Q20 net loss of RM320m was a miss against our/consensus expectations; this was attributed to a RM400m impairment loss on goodwill (over Global Hospitals), a RM80m FX loss on net borrowings and a RM60m FX loss upon substantive liquidation of its JV (Khubchandani Hospital). Excluding these exceptional items, IHH Healthcare would have recorded an underlying 1Q net profit of RM189m (+0.5% y-o-y), deemed below our full-year forecast (at 25%) as we now expect a weaker 2QFY20F.

Some Resiliency in 1Q20 (revenue -2% Y-o-y, Net Profit +0.5% Y-o-y)

• IHH Healthcare already saw a broad-based decline in revenue (3-16%) and inpatient admissions across all its markets, while average revenue intensity improved y-o-y in Singapore (+10.9%, due to better case mix) and Acibadem Holdings in Turkey (+14.8%, partly due to more complex cases and a 13.1% price hike). EBITDA loss at its North Asian operations of RM67m was flattish q-o-q but widened y-o-y due to additional manpower.
• Overall, IHH Healthcare’s 1Q20 EBITDA fell 10% on lower revenues and higher Covid-related costs, which were partially mitigated by government reliefs and grants. We note that Acibadem’s 1Q EBITDA would have increased 2% y-o-y on constant currency terms.

2Q20F Likely to be Worse Off; Potential Pent Up Demand in 2H

• We project 2Q20F to be significantly weaker on the back of travel restrictions implemented since late-Mar 20 and deferment of non-essential treatments. Within the domestic patient volume in 2Q, 40% of cases were urgent, with the remaining equally split between elective and semi-elective cases (which started to see some recovery in Jun 20).
• We also expect more telemedicine, screening and testing services, coupled with patients decanted from public hospitals, to offset some revenue loss.
• We further trim our FY20F EPS by 9.8% on Covid-19 disruption and keep our FY21-22F EPS unchanged.

No Change to Our ADD Call

• We believe IHH Healthcare has sufficient financial strength to tide it through the difficult times (0.17x net gearing as of end 1Q20), as it also works to defer its non-critical expansion plans (e.g. delaying the completion of Parkway Shanghai Hospital to FY21F) and further pare down its non-lira debt exposure (€40m reduction in 1Q20).
• Reiterate ADD, with an unchanged SOP-based Target Price of RM6.25.
• Potential Catalysts: faster easing of travel restrictions and successful execution of refreshed strategy.
• Downside risks: virus resurgence and overhang from delayed IHH Healthcare/Fortis court proceedings.

Source: CGS-CIMB Research - 29 Jun 2020