• IHH Healthcare’s 2Q21 core profit well exceeded expectations. Non-COVID-19 patient admission was surprisingly robust while GHK achieved operational breakeven. While pandemic-related contributions are expected to normalise, this is balanced by turnaround in GHK and Acibadem’s operations have been de-risked significantly. IHH Healthcare’s valuations are attractive, with resilient yet defensive 3-year earnings (2020-23F) CAGR of 25.6%.
• Maintain BUY rating on IHH Healthcare with a higher target price RM6.40.

IHH Healthcare's 2Q21 Earnings Exceeded Expectations

• IHH Healthcare’s 2Q21 core profit of RM463.6m (+38% q-o-q, -734% y-o-y) brought 1H21 core profit to RM799m (+587% y-o-y). 2Q21 core profit is well above both our and consensus expectations at 80% and 73% of full-year estimates. The positive deviation was largely due to sustained inpatient admissions at established markets while Gleneagles Hong Kong (GHK) achieved operational breakeven sooner than expected.

Low-base effect, returning inpatient volume and COVID-19 services boosts earnings.

• IHH Healthcare's Singapore operations’ top-line growth grew 57% y-o-y. This was due to:
  1. a low 2Q20 base effect (inpatient volume contracted 34% y-o-y); and
  2. COVID-19 patients and COVID-19-related services, which contributed to 24% of revenue.
• COVID-19 services are likely to contribute to elevated volumes for the rest of 2021. Seeing that the endemic situation in Singapore is relatively curtailed, the number of non-COVID-19 patients should gradually recover.
• In Malaysia, revenue grew correspondingly at 53% y-o-y. It was partly due to similar circumstances to Singapore, but with lower COVID-19-related contributions (12% of revenue). It well surpassed our expectations with non-COVID-19 patient volumes recovering on a y-o-y basis. That said, we expect COVID-19 contributions to tail off in 4Q21 as the country expects to achieve herd immunity by then.

GHK achieves breakeven while Acibadem see European boost.

• Gleneagles HK’s European operations as its COVID-19 contributions remained stable on a q-o-q basis.

India sees blockbuster growth off pandemic outbreak but should normalise ahead.

• India operations saw revenue doubling (inpatient admissions: +46%, revenue intensity 48%). This was off the back of COVID-19 contributions (31% of revenue). We believe it should normalise in the quarter ahead, with the COVID-19 situation in India improving significantly.

Earnings Revision / Risk

• We raise our earnings forecast for IHH Healthcare by 20/9/6% for 2021-23 to factor in higher inpatient admissions and better margins.
• Key downside risks are:
  1. execution risk;
  2. shortfall in turning around Fortis; and
  3. heightened regulatory hurdles.

Ihh Healthcare - Valuation

• Maintain BUY rating on IHH Healthcare with an SOTP-based target price of RM6.40 (from RM5.70). Our appear attractive with:
  1. resilient yet defensive 3-year earnings (2020- 23F) CAGR of 25.6%; and
  2. IHH Healthcare’s sound track record.

• Earnings drag arising from its North Asia operations have been addressed 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 - 27 Aug 2021