• We came out from IHH Healthcare's briefing more positive as real demand is returning.
• GHK hit EBITDA breakeven. Lab business identified as a new growth driver.
• We reiterate our ADD call on IHH Healthcare with a higher SOP-based target price of RM7.31.

Encouraging Recovery in IHH Healthcare's Operating Metrics

• At IHH Healthcare’s results briefing, management sounded cautiously optimistic with its strong performance in 2Q21. Patient volume improved on a q-o-q basis in Malaysia, Turkey and Europe, while revenue intensity increased across the board. Occupancy also improved q-o-q across the board, despite the high COVID-19 cases and borders remaining closed for some of its markets. This is encouraging, as we understand that revenue from COVID-19 patients was not substantial in 2Q21, and the q-o-q improvements were mainly driven by recovery in domestic and foreign patient volume.
• COVID-19-related services (9.5% of its 2Q21 revenue), improved 65% q-o-q, based on our estimates. We understand that 50% of Singapore’s COVID-19-related service revenue was generated from border screening and testing, which are more sustainable for a longer term.

Most Markets Achieved PAT Positive in 1H21

• In 1H21, most of IHH Healthcare’s markets were PAT positive, except for greater China, which was affected by a longer-than-expected gestation at Gleneagles Chengdu and pre-opening costs for Parkway Shanghai Hospital.
• Gleneagles HK finally achieved EBITDA breakeven in May 21, and we expect continuous EBITDA growth as IHH Healthcare ramps up operations.
• Singapore, Malaysia and India business would continue to be supported by domestic demand and COVID-19-related services in the near term.
• Turkey and Europe should continue to ride on the recovery of patient volumes, both domestic and foreign.

IHH Identified Lab Business as An ROE Driver

• IHH Healthcare has achieved its target to double ROE, which hit 7.2% in 2Q21, but we understand that an immediate sustainable run-rate would be in the 5-6% range. IHH Healthcare is planning to expand its lab business, which has superior ROE and serves in-house and external customers; it generated a revenue of RM975m in 1H21 (12% of 1H21 revenue).
• While the focus now is on recovery, we believe that IHH Healthcare would embark on growth mode again as the operating environment improves. Its healthy gearing of 25% will support its expansion plans.
• Patient volume should continue to improve, but we expect IHH Healthcare to incur higher expenses in order to ramp up its operations to cope with the higher demand.

Reiterate ADD on IHH Healthcare With a Higher Target Price of RM7.31

• We raise our FY21-23F earnings per share forecasts for IHH Healthcare by 18-41% to factor in higher revenue from COVID-19 related services and cost savings across all countries as well as faster EBITDA breakeven from Gleneagles HK. This, together with the higher market value for Parkway Life REIT (SGX:C2PU) and Fortis Healthcare, lifted our target price for IHH Healthcare to S$7.31.

• Re-rating catalysts / downside risks: stronger / weaker patient volume and intensity.

Source: CGS-CIMB Research - 30 Aug 2021