• IHH Healthcare saw a strong start to the year with 1Q21 core profit growing 77.3% y-o-y on the back of a domestic recovery, while benefitting from COVID-19-related services. That said, tightened measures in key core markets are expected to weigh over the near term.
• IHH Healthcare's valuations are attractive, with resilient yet defensive 3-year earnings (2020-23F) CAGR of 23.5%. Furthermore, GHK’s earnings drag and Acibadem’s operations have been de-risked significantly.
• Maintain BUY. Target price for IHH Healthcare unchanged at RM5.70.

Ihh's 1q21 Results

IHH's 1Q21 earnings off to strong start but within expectations off the back of tightened COVID-19 measures in key markets.

• IHH Healthcare (SGX:Q0F)’s 1Q21 core profit grew 77.3% y-o-y but contracted 9.6% q-o-q. 1Q21 core profit is within below both our and consensus expectations at 33% of full-year estimates. Top-line was well supported by COVID-19 related services, which more than offset lower elective cases, and boosted earnings. However with the tightened COVID-19 measures in both its key markets, Singapore and Malaysia, we expect a soft 2Q21.

Low-base effect and COVID-19 services boost revenue in key markets but expect headwinds in 2Q21.

• IHH Healthcare's Singapore operations’ top-line growth grew 14% y-o-y. This was due to:
  • a low 1Q20 base effect, with patient volume tailing off at the end of the quarter;
  • almost a full recovery in domestic volume; and
  • COVID-19 patient and COVID-19 related services, which had a mid-teens contribution to revenue.
• EBITDA margins further improved by 3.8ppt to 36.1% thanks to better case mix and lower labour cost.
• Meanwhile in Malaysia, revenue grew by 10% y-o-y due to a low-base effect, further boosted by the Prince Court acquisition and COVID-19 related services. Going forward, the tightening of COVID-19 movement measures is likely to curtail patient volumes in both these key markets. Meanwhile in Malaysia, we do not expect the significant COVID-19 inpatient volume to offset a drop in elective patient volume.

GHK expects to break even this year while Acibadem maintains its growth trajectory.

• Gleneagles HK’s (GHK) EBITDA losses improved by 35% to -RM20.5m thanks to increased inpatient admissions (16%) and revenue intensity (11%). IHH Healthcare's management expects GHK to breakeven at the EBITDA level this year, provided that Hong Kong does not stay in a protracted lockdown.
• Meanwhile, Acibadem’s revenue grew at 11% y-o-y in ringgit terms. This was off the back of a slight decline in inpatient admissions (-2%) but was more than offset by revenue intensity growing 28.7% y-o-y. The significant spike in revenue intensity is due to better case mix through complex cases and price adjustments to counter inflation. Its non-lira debt exposure now stands at -24m (end-1Q20: €183m). The unhedged euro exposure will be further de-risked as IHH Healthcare continues to expand its euro contribution.

India sustains recovery even prior to COVID-19 cases skyrocketing.

• IHH Healthcare's India operations continue to see a sustained recovery, with revenue growing 11% y-o-y and 4.5% q-o-q. This was off the back of COVID-19 related services and recovery in non-COVID-19 inpatient admissions. Margins improved off the back of a better mix of complex cases. Going forward, we expect occupancy rates to improve further with India’s COVID-19 cases skyrocketing. However, this would be slightly diminished by lower elective cases.

Earnings Revision / Risk

• Our earnings forecasts for IHH Healthcare are unchanged.
• Key downside risks are:
  1. execution risk,
  2. shortfall in turning around Fortis, and
  3. heightened regulatory hurdles. Key upside risks are:
  4. faster-than-expected gestation of GHK, and
  5. sustained growth at core markets.

Valuation

Maintain BUY on IHH Healthcare with an unchanged SOTP-based target price of RM5.70.

• Our SOTP-based target price for IHH Healthcare implies 37.0x 2022F P/E, below its historical 5-year, 12-month forward P/E of 46x. Valuations appear attractive with:
  • resilient yet defensive 3-year earnings (2020-23F) CAGR of 20.1%; and
  • IHH Healthcare’s sound track record.
• Earnings drag arising from its North Asia operations have largely diminished while Acibadem’s operations are being increasingly de-risked with an increasing foreign patient mix.

• The diminished risks and attractive valuations far exceed the uncertainty revolving around Fortis and IHH Healthcare’s initial 31% stake that has been brought into question.

Source: UOB Kay Hian Research - 1 Jun 2021