HEALTHCARE IHH HEALTHCARE

(IHH MK EQUITY, IHHH.KL) 30 Aug 2021

Diagnostic services contributed RM975mil in 1HFY21 Company report HOLD

AmInvestment Bank (Maintained) www.amequities.com.my 03-2036 2290 Rationale for report: Company update

Price RM6.35 Fair Value RM6.29 Investment Highlights 52-week High/Low RM5.88/RM4.85  We maintain our HOLD call on IHH Healthcare (IHH) with Key Changes an unchanged fair value (FV) of RM6.29/share. Our Fair value  valuation is based on a DCF with a WACC of 7.0% and EPS  terminal growth rate of 3.5%. Incorporated in our FV is a 3% YE to Dec FY20 FY21F FY22F FY23F price premium for our ESG rating of 4 stars.

Revenue (RM mil) 13,404.6 17,020.0 18,789.0 19,300.0  We remain positive on the group’s growth prospects Core net profit (RM mil) 715.3 1,520.7 1,806.7 2,268.6 underpinned by the expansion of its laboratory services, FD Core EPS (sen) 8.1 17.3 20.6 25.8 FD Core EPS growth (%) (22.3) 112.6 18.8 25.6 cost-cutting and clustering strategies, as well as solid Consensus Net Profit (RM mil) - 1,276.0 1,465.0 1,654.0 growth in Gleneagles. However, with PE ratio DPS (sen) 4.0 8.5 10.1 12.7 pushing well over 40x for FY22F EPS, we believe that the PE (x) 71.7 33.7 28.4 22.6 multiyear growth prospects have largely been priced in. EV/EBITDA (x) 20.1 15.0 13.4 12.3 Div yield (%) 0.7 1.5 1.7 2.2 ROE (%) 1.3 5.2 6.4 8.2  Here are some key takeaways from the meeting: Net Gearing (%) 30.6 28.6 25.5 45.0 1. IHH has seen an EBITDA breakeven in Gleneagles Hong

Stock and Financial Data Kong at May (as targeted). The group is now shifting focus towards achieving a net income breakeven. The hospitals’ Shares Outstanding (million) 8,774.0 growth trajectory is expected to be upwards as heavy lifting in Market Cap (RM mil) 51,240.2 Book Value (RM/share) 2.48 overcoming overhead costs have already been overcome. P/BV (x) 2.4 ROE (%) 1.3 The group cautioned that while remains a solid Net Gearing (%) 30.6 market prospect, it requires more breadth and longevity to

Major Shareholders Mitsui & Co Ltd (32.9%) break even. The group will be taking an impairment hit for some (26.0%) assets as a more prudent method in managing its balance EPF (9.0%) sheet. Free Float 1,536.8 Avg Daily Value (RM mil) 20.5 2. IHH’s laboratory business, which brought in a revenue of

Price performance 3mth 6mth 12mth RM975mil in 1HFY21 across all geographical markets, has been successful. The group will continue to drive the Absolute (%) 12.5 15.0 7.9 business due to the solid returns despite low capex Relative (%) 12.0 14.4 5.5 requirements. The group highlighted that the EBITDA margins

are much higher than the average of 25% seen in hospitals. The 7.0 2,000 segment’s contribution has seen steady growth throughout the 1,800 6.0 span of the pandemic 1,600 5.0 1,400 Currently, most of the revenue is from internal 1,200 4.0 contributions, although external contributions are growing 1,000 3.0 rapidly. , via SRL Diagnostics owned by Fortis, owns >420 800 outlets and is by far the largest revenue contributor. 600 2.0 sits at second place. 400 1.0 200 We expect the segment to grow even further in this coming 0.0 0 Aug-16 Aug-17 Aug-18 Aug-19 Aug-20 year as Covid-19 has likely become endemic. While we expect non-Covid-19 lab work to decrease subject to Covid-19 IHH MK FBMKLCI Index cases resurgences, Covid-19-related testing is expected to

consistently increase as the economy opens up further.

IHH Healthcare 30 Aug 2021

3. IHH cautioned that it may not be able to replicate 1HFY21’s cost efficiencies in 2HFY21. The group cited higher wage costs, the need to give back to frontline workers, less government grants and a sharp drop in Covid-19 patients in India, which offers a slightly higher revenue contribution.

However, the group maintained that the outlook for 3QFY21 is positive, as the volumes of non-Covid-19 patients across geographical markets are expected to recover. The countries in the region have different dynamics of recovery. India’s patient mix is quick to respond to the declines in Covid-19 case volumes, whereas Singapore is more gradual.

All geographical segments saw improvements in occupancy rate (both QoQ and YoY) in the last quarter. Singapore has recovered its domestic volume, although foreign patients have yet to return. Covid-19 service revenue contributed to a sizeable 24% of Singapore revenue.

4. Prince Court Medical Centre (PCMC) contributed RM65mil (10%) to Malaysian revenue in 2QFY21. Aside from that, performance is expected to remain muted in 3QFY21, given the stricter lockdown impositions. Roughly 300 non-Covid-19 patients were forwarded by the Ministry of Health in 2QFY21, although larger volumes will come in 3QFY21 as the government struggled to bear the burden of Covid-19 patients.

EXHIBIT 1: PB BAND CHART EXHIBIT 2: PE BAND CHART

3.00 200.00

180.00 2.50 160.00 +1δ Avg -1δ 140.00 2.00 +1δ 120.00

1.50 100.00 Avg 80.00 1.00 60.00 -1δ 40.00 0.50 20.00

0.00 0.00 Jul-17 Jul-18 Jul-19 Jul-20 Jul-21 Jul-17 Jul-18 Jul-19 Jul-20 Jul-21 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21

EXHIBIT 3: ESG MATRIX Overall ★ ★ ★ ★ Waste management ★ ★ ★ Natural resource conservation ★ ★ ★ Occupational safety + health ★ ★ ★ ★ Workplace diversity ★ ★ ★ Employee training + wellbeing ★ ★ ★ ★ Patient safety + welfare ★ ★ ★ ★ Communal efforts ★ ★ ★ ★ ★ Corruption-free pledge ★ ★ ★ Accessibility & transparency ★ ★ ★ We accord a discount/premium of -6%, -3%, 0%, +3% and +6% on fundamental fair value based on the overall ESG rating as appraised by us, from 1-star to 5-star Source: AmInvestment Bank Bhd

AmInvestment Bank Bhd 2 IHH Healthcare 30 Aug 2021

EXHIBIT 4: FINANCIAL DATA

Income Statement (RMmil, YE 31 Dec) FY19 FY20 FY21F FY22F FY23F

Revenue 14,912.5 13,404.6 17,020.0 18,789.0 19,300.0 EBITDA 3,318.0 2,876.3 3,846.5 4,246.3 5,037.3 Depreciation/Amortisation (1,355.5) (1,397.3) (1,337.6) (1,348.7) (1,360.0) Operating income (EBIT) 1,962.5 1,479.0 2,508.9 2,897.6 3,677.3 Other income & associates 74.1 18.4 17.0 18.7 20.6 Net interest (772.3) (704.7) (908.5) (851.7) (871.9) Exceptional items 369.2 426.5 380.0 380.0 380.0 Pretax profit 1,042.7 567.5 1,617.4 2,064.6 2,826.0 Taxation (527.9) (361.7) (647.0) (825.8) (1,130.4) Minorities/pref dividends 36.6 83.0 170.2 187.9 193.0 Net profit 551.5 288.9 1,140.7 1,426.7 1,888.6 Core net profit 920.7 715.3 1,520.7 1,806.7 2,268.6

Balance Sheet (RMmil, YE 31 Dec) FY19 FY20 FY21F FY22F FY23F

Fixed assets 11,196.3 11,569.5 11,669.5 11,769.5 11,869.5 Intangible assets 12,574.7 12,123.1 12,123.1 12,123.1 12,123.1 Other long-term assets 13,656.0 13,529.1 13,546.1 13,564.8 13,585.4 Total non-current assets 37,427.0 37,221.7 37,338.7 37,457.4 37,578.0 Cash & equivalent 4,714.7 4,187.8 3,011.1 3,629.6 4,474.8 Stock 350.3 420.2 474.8 509.6 546.7 Trade debtors 2,107.9 1,953.1 2,593.7 2,752.3 2,860.2 Other current assets 453.4 751.4 1,165.4 1,343.0 1,550.8 Total current assets 7,626.3 7,312.5 7,245.0 8,234.4 9,432.4 Trade creditors 3,858.2 3,891.9 4,894.0 5,160.7 5,402.3 Short-term borrowings 637.8 996.4 1,196.4 1,396.4 1,596.4 Other current liabilities 853.2 726.8 672.5 672.5 672.5 Total current liabilities 5,349.2 5,615.1 6,762.8 7,229.6 7,671.2 Long-term borrowings 8,266.1 8,664.7 8,764.7 8,864.7 8,964.7 Other long-term liabilities 3,344.0 3,219.1 1,625.3 1,625.3 1,625.3 Total long-term liabilities 11,610.1 11,883.8 10,390.0 10,490.0 10,590.0 Shareholders’ funds 22,339.5 21,739.8 22,135.4 22,676.8 23,453.7 Minority interests 5,754.4 5,295.6 5,295.6 5,295.6 5,295.6 BV/share (RM) 2.55 2.48 2.52 2.58 2.67

Cash Flow (RMmil, YE 31 Dec) FY19 FY20 FY21F FY22F FY23F

Pretax profit 1,042.7 567.5 1,617.4 2,064.6 2,826.0 Depreciation/Amortisation 1,355.5 1,397.3 1,337.6 1,348.7 1,360.0 Net change in working capital (523.9) (223.0) 289.9 54.6 76.1 Others 573.2 703.0 261.5 25.9 (258.5) Cash flow from operations 2,447.5 2,444.8 3,506.4 3,493.8 4,003.6 Capital expenditure (3,311.6) (2,009.5) (1,274.8) (1,299.5) (1,327.7) Net investments & sale of fixed assets - - - - - Others 717.4 (68.4) - - - Cash flow from investing (2,594.2) (2,077.8) (1,274.8) (1,299.5) (1,327.7) Debt raised/(repaid) (1,081.3) 588.0 300.0 300.0 300.0 Equity raised/(repaid) - - - - - Dividends paid (476.6) (519.5) (745.1) (885.3) (1,111.6) Others (1,357.2) (928.6) (1,039.5) (990.6) (1,019.1) Cash flow from financing (2,915.1) (860.1) (1,484.6) (1,575.9) (1,830.7) Net cash flow (3,061.8) (493.1) 747.0 618.5 845.2 Net cash/(debt) b/f 5,710.6 2,641.5 2,264.0 3,011.1 3,629.6 Net cash/(debt) c/f 2,641.5 2,264.0 3,011.1 3,629.6 4,474.8

Key Ratios (YE 31 Dec) FY19 FY20 FY21F FY22F FY23F

Revenue growth (%) 29.4 (10.1) 27.0 10.4 2.7 EBITDA growth (%) 33.7 (13.3) 33.7 10.4 18.6 Pretax margin (%) 7.0 4.2 9.5 11.0 14.6 Net profit margin (%) 3.7 2.2 6.7 7.6 9.8 Interest cover (x) 2.5 2.1 2.8 3.4 4.2 Effective tax rate (%) 50.6 63.7 40.0 40.0 40.0 Dividend payout (%) 86.4 179.8 65.3 62.1 58.9 Debtors turnover (days) 50 55 49 52 53 Stock turnover (days) 9 10 10 10 10 Creditors turnover (days) 94 106 94 98 100

Source: Company, AmInvestment Bank Bhd estimates

AmInvestment Bank Bhd 3 IHH Healthcare 30 Aug 2021

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