KEY INVESTMENT HIGHLIGHTS

• IHH Healthcare returns to black with a normalised earnings of RM238.4m in 3QFY20, growing by +17.8%yoy

• Lower revenue and patients visit persisted during the quarter across its market due to travel restrictions brought about by Covid-19

• Earnings cushioned by higher revenue intensity per patient and better cost management

• FY20-21F earnings maintained

• Maintain BUY with an unchanged TP of RM6.27 per share

3QFY20 normalised earnings grew +17.8%yoy. IHH Healthcare Bhd (IHH) returned to black as anticipated in 3QFY20 with a reported earnings of RM310.0m. Meanwhile, its normalised earnings excluding the exceptional items came in at RM238.4m which is +17.8% growth yearover-year. This brought its 9MFY20 normalised earnings to RM343.6m which was broadly within ours but below consensus’ full-year FY20 earnings estimates at 68.0% and 53% respectively. During the quarter core performance remained intact however, its 3QFY20 revenue and earnings have yet to return to its pre-novel coronavirus (Covid-19) level due to continued enforcement of movement restrictions in the key home countries it operates in. The lower revenue and earnings were also exacerbated by the inevitable fixed operating costs as well as; the cost incurred to implement Covid-19 precautionary measures across the group. This was however; offset by Covid19-related services rendered by the company and in some countries (i.e: Turkey and India) the hospitals treats walk-in Covid19 patients.

Lower inpatients offset by higher revenue intensity per patient. In 3QFY20, Parkway Pantai operations in Singapore, Malaysia and India markets recorded contractions in inpatient admissions by -19.0%yoy, - 29.0%yoy and -33.0%yoy respectively following travel restrictions imposed to curb the spread of Covid-19 in these countries. This has resulted in the decline in revenue from Parkway Pantai by -10.0%yoy. The decline was however supported by revenue intensity per inpatient which rose by +1.8%yoy, +27.1%yoy and +25.4%yoy in Singapore, Malaysia and India respectively - driven by higher occupancy rate of between 50-60% and; the execution of urgent complex cases undertaken during the quarter. Acibadem rebounded despite weak Turkish Lira.

Acibadem’s revenue during the quarter was comparable to 3QFY19 at RM922.7m. This is despite the decline in number of inpatient admissions during the quarter by -12.0%yoy. The decline was partly cushioned by higher revenue intensity per patient which grew by +8.1%yoy during the quarter attributable to: (i) rebound in occupancy rate to 65%;(ii) more complex cases undertaken during the quarter and; (iii) pricing adjustments made during the quarter to account for inflation. Furthermore, we understand that the number of foreign patients have recovered to 15% of its total number of patients which is only slightly below the 18% recorded in 3QFY19. Revenue from foreign patients which are mostly EUR/USD denominated contributes 35% of the group’s revenue during the quarter.

Impact to earnings. We are maintaining our FY20-21F earnings forecasts at this juncture as we opine that IHH is on track to meet our earnings projections.

Target price. Our target price is maintained at 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 soft demand arising from the ongoing Covid-19 outbreak. This is expected to continue to cap demand for medical tourism and result in deferrals of non-urgent and non-essential procedures and services in the near term. Nonetheless, we are maintaining our BUY recommendation as we opine that the low inpatient admissions will not persist and this will be duly compensated by the increase in revenue per inpatient as patients gradually returns to undertake procedures that were postponed previously. 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. In addition, the acquisition of Prince Court Medical Center (PCMC) which was completed back in September will start to contribute its first full-quarter revenue in 4QFY20 is expected to contribute positively to the group’s Malaysian revenue going forward.

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 RM4.2b cash position and 0.21times gearing as of September 2020.

Source: MIDF Research - 30 Nov 2020