KEY INVESTMENT HIGHLIGHTS

• IHH Healthcare normalised earnings came in at -RM84.2m in 2QFY20, dipping by >100.0%yoy

• Lower revenue and patients visit recorded across its market due to travel restrictions brought about by Covid19

• Earnings cushioned by higher revenue intensity per patient and strong revenue recognition from Acibadem

• FY20-21F earnings lowered by -31.8% and -20.7% respectively

• Maintain BUY with a revised TP of RM6.27 per share

Below expectations. IHH Healthcare Bhd (IHH) reported a loss of - RM120.6m in 2QFY20. However, after excluding the exceptional items, 2QFY20 normalised earnings came in at -RM84.2m. This brings its 1HFY20 normalised earnings to RM105.2m which was below ours but within consensus’ full-year FY20 earnings estimates at 14.2% and 15.9% respectively. While core performance remained intact, the 2QFY20 earnings was dragged by the outbreak of the novel coronavirus (Covid-19) which has led to the deferment and postponement of elective medical procedures as well as; lower patients visit to hospitals. This was however; offset by Covid-19 related services rendered by the company and in some countries (i.e: Turkey and India) the hospitals treats walk-in Covid-19 patients.

Loss of patients offset by higher revenue intensity per patient.

In 1QFY20, both Singapore and Malaysia markets recorded a contraction in inpatient admissions by -34.4%yoy and -42.8%yoy respectively following travel restrictions imposed to curb the spread of Covid19 in both countries. This had resulted in the decline in revenue from its Singapore hospitals by -24.0%. Similarly, Malaysian hospitals’ revenue also contracted by -23.0%yoy in-line with the contraction in inpatient admission. The decline was however supported by revenue intensity per inpatient which rose by +9.0%yoy in Singapore and +21.9%yoy in Malaysia respectively, driven by the execution of urgent complex cases undertaken during the quarter.

Acibadem remains resilient despite weak Turkish Lira.

Acibadem’s performance during the quarter has been impacted by both the restrictions imposed following the spread of Covid19 in Turkey as well as; a weak Turkish Lira. Acibadem’s revenue (after stripping off the effects of weak TRY translation) declined by -25.0%yoy in-line with the - 34.1%yoy contraction in number of inpatients admitted. However, the decline was partly cushioned by higher revenue intensity per patient which grew by +23.7%yoy during the quarter attributable to: (i) more complex cases undertaken during the quarter and; (ii) pricing adjustments made during the quarter to account for inflation.

Impact to earnings. We are revising our earnings forecasts for FY20F and FY21F downwards by -31.8% and -20.7% respectively as we take into account soft number of patients admission (in particular foreign patients which contributes to high revenue intensity) following the ongoing border controls implemented in various countries to curb the spread of Covid-19 which is expected to remain in force in the near term which might continue to impact patients visits, especially medical travellers who are unable to travel due to borders being closed. Foreign patients make up about 26%, 7% and 16% of its total revenue in Singapore, Malaysia and Central and Eastern Europe pre-Covid19.

Target price. Following the earnings revision, we are revising our target price slightly to RM6.27 per share (previously RM6.34). We derived our target price based on DCF valuation method with assumption of terminal growth at 4.7% and WACC of 9.0%.

Maintain BUY. We acknowledge that the group is facing near term business headwinds particularly in the form of weak demand arising from Covid-19 outbreak. This is expected to slow down demand for medical tourism and result in deferrals of non-urgent and non-essential procedures and services. Nonetheless, we are maintaining our BUY recommendation as we opine that the loss in patients visit will be compensated in 2HFY20 as we have seen recovery in terms of occupancy which have risen to 50-60% level starting June across all IHH’s markets after dropping to an all-time low of 30-55% in April and May 2020 as patients gradually return to undertake deferred non-essential and non-urgent elective treatments. Furthermore, we opine that the group will also benefit from higher revenue intensity per patient as the group continues to ramp up operations in its existing and newly operational hospitals. All in, we remain positive on IHH’s future earnings trajectory as it continues to operate in relevant markets which are not only in need of quality healthcare services but also underserved due to its large population which will increase its resilience against adversity.

Going forward, the group expects to further drive efficiency in its operation as well as realising additional resources through divestments of underperforming non-core assets. Through these initiatives, we believe that the group would be able to protect its profit margin and redeploy the additional cash to pare down debt. Meanwhile, we believe that the strong cashflow generative markets like Singapore and Malaysia will continue to support group’s performance in the near term. In addition, we expect a long-term growth opportunities in India and Greater China as the markets are largely under-served. In summary, we continue to like IHH for its: (i) geographically-diversified revenue base; (ii) strong synergies across its global network; and (iii) robust balance sheet with RM5.4b cash position and 0.17times gearing as of March 2020.

Source: MIDF Research - 28 Aug 2020