Results Note 27 November 2020 IHH Healthcare UNDERPERFORM ↔ Price: RM5.60 3QFY20 Recovers, India Still Loss-making Target Price: RM4.56 ↔ By Raymond Choo Ping Khoon l [email protected] 9MFY20 Core Net Profit (CNP) of RM344m (-46% YoY) came Share Price Performance in at 53%/62% of our/consensus full-year forecasts. We consider the results to be within our expectation in 6.10 anticipation of further earnings recovery following strong 5.90 rebound in occupancy rates on the back of the gradual 5.70 reopening of markets which IHH operates in. Looking at the 5.50 performance of its 62%-owned Continental Hospitals and 5.30 74%-owned Global Hospitals acquired back in 2015 where 5.10 its EBITDA is hardly ever positive, India is coming across 4.90 as a tough market place. We maintain our SoP-TP of 4.70 RM4.56. Reiterate UP. 4.50 Key results’ highlights. QoQ, 3QFY20 headline revenue and EBITDA KLCI 1,612.11 rebounded from a low base in 2QFY20 by 37% and 210%, respectively, YTD KLCI chg 1.5% due to rebound in occupancy rates following easing of travel restrictions YTD stock price chg 2.4% and lockdowns. Specifically, Turkey showed a strong recovery as lockdowns eased markedly. Similarly, EBITDA increased across the Stock Information board led by strong rebound in inpatient admissions. Overall inpatient Shariah Compliant Yes admission rose across the board including Singapore (+26%), Malaysia Bloomberg Ticker IHH MK Equity (+37%), India (+37%) and Acibadem (+27%). This brings 3QFY20 Core Market Cap (RM m) 49,152.4 Net Profit (CNP) to RM234m compared to a core net loss of RM84m Shares Outstanding 8,777.2 2QFY20 due to narrower losses at India (3QFY20 core net loss at 52-week range (H) 5.94 RM28m compared to 2QFY20 of RM156m). 52-week range (L) 4.55 YoY, 9MFY20 revenue and EBITDA decreased 13% and 24%, 3-mth avg daily vol: 2,636,431 respectively, due to the pandemic as patients postponed non-urgent Free Float 11% and non-essential treatment and visits to hospitals and healthcare Beta 0.8 facilities (primarily in 2QFY20). The Group also saw a decrease in foreign patient volume especially from March 2020 onwards due to the Major Shareholders various travel restrictions implemented across the countries that it Mitsui & Co Ltd 32.9% operates in. Overall, inpatient admission fell across the board including PulauMemutik Ven SdnBhd 26.0% Singapore (-21%), Malaysia (-25%), India (-28%) and Acibadem (- Employees Provident Fund 9.7% 17%). This brings 9MFY20 CNP to RM344m (-46%) (excluding an impairment on the remaining goodwill of RM400.5m from an investment Summary Earnings Table made into Global Hospitals in India) due to widening losses in India. FY Dec (RMm) 2019A 2020E 2021E Outlook. The group has undertaken cost initiatives measures to defer Turnover 14,913 11,909 15,030 non-essential capex and opex to mitigate any revenue shortfall. The PBT 1,047.7 847.1 1,527.3 Group took pro-active initiatives to partially mitigate the effects of lower Net Profit (NP) 556.5 649.5 929.7 patient volumes by improving case-mix and diversifying into new Core NP 920.7 649.5 929.7 revenue streams by providing COVID-19 screening services. COVID-19 Consensus (NP) 550.6 977.7 related services contributed about 10%, 3% and 21% of the 3QFY20 Earnings Revision - - - revenues in Singapore, Turkey and India, respectively. The Group has Core EPS (sen) 10.5 7.4 10.6 also entered into an agreement to dispose its 50% interest in Apollo Core EPS growth (%) (10.5) (29.5) 43.1 Gleneagles Hospital Limited, a joint venture, and the disposal is NDPS (sen) 4.0 4.0 4.0 expected to be completed by 15 December 2020.Thus far, the group BVPS (RM) 2.55 2.58 2.65 has further deleveraged its non-lira debt in its Turkish operations from Core PER (x) 51.6 78.2 54.7 EUR288m as at Dec 2019 to EUR92m as at Sept 2020. Looking at the PBV(x) 2.2 2.2 2.1 Net Gearing (%) 18.8 26.4 22.1 performance in 62%-owned Continental Hospitals and 74%-owned Net Div. Yield (%) 0.7 0.7 0.7 Global Hospitals acquired back in 2015 where EBITDA is hardly positive, India is seen as a tough operating environment. We are concerned over issues at Fortis, including an auditor’s qualified audit report in FY19, potential risk of provisions, lapses in internal controls leading to regulatory probing, which could well mean execution risk. Maintain UP. We maintain our SoP-TP of RM4.56. The stock is trading at rich valuations of 78x and 54x on FY20E and FY21E EPS, respectively, compared to expected earnings growth averaging 7% each over the next two years. Key risk to our call is faster-than-expected ramp-up in new hospitals. PP7004/02/2013(031762) Page 1 of 5 IHH Healthcare Results Note 27 November 2020 Result Highlight (YTD) FY Dec 2019 2020 Y-o-Y (RM m) 9M 9M Chg (%) Turnover 11,076.4 9,638.6 (13.0) Parkway Pantai 8,001.0 6,841.4 (14.5) Acibadem Holdings 2,776.2 2,492.3 (10.2) IMU Health 192.5 184.6 (4.1) Plife REIT 259.7 274.8 5.8 Others (Plife REIT inter-segment revenue) (153.0) (154.4) 0.9 EBITDA 2,416.2 1,834.7 (24.1) Parkway Pantai 1,740.5 1,261.8 (27.5) Acibadem Holdings 606.7 515.8 (15.0) IMU Health 73.7 63.2 (14.2) Plife REIT 211.3 217.3 2.8 Others (59.7) (64.9) 8.7 Eliminations (156.3) (158.6) 1.5 Depreciation & amortisation (959.7) (1,004.5) 4.7 Other operating income 232.3 559.9 141.0 Finance cost (658.4) (881.6) 33.9 Finance income 101.2 243.8 140.9 Associates and JV (15.1) 3.6 (124.1) Pretax profit 847.0 (93.4) (111.0) Taxation (372.2) (196.2) (47.3) Minority interest 36.0 159.1 341.8 PATAMI 510.8 (130.5) (125.5) Core net profit 630.8 343.6 (46) Core EPS (sen) 6.4 3.2 (51) EPS (sen) 5.1 (2.3) (144.5) EBITDA margin (%) 22 19 Parkway Pantai 22 18 Acibadem Holdings 22 21 IMU Health 38 34 Pretax margin (%) 8 (1) Effective tax rate (%) 44 (210) Source : Bursa Malaysia, Kenanga Research PP7004/02/2013(031762) Page 2 of 5 IHH Healthcare Results Note 27 November 2020 Result Highlight FY Dec 1Q 2Q 3Q QoQ (RMm) 2020 2020 2020 %chg Turnover 3,555.2 2,565.1 3,518.3 37.2 Parkway Pantai 2,492.6 1,847.0 2,501.8 35.5 Acibadem Holdings 955.8 613.9 922.7 50.3 IMU Health 67.3 63.2 54.0 (14.5) PLife REIT 90.0 92.5 92.2 (0.3) Others (Plife REIT inter-segment revenue) (50.5) (51.5) (52.4) 1.8 EBITDA 734.4 268.0 832.7 210.7 Parkway Pantai 486.6 178.5 596.7 234.3 Acibadem Holdings 217.3 74.5 224.1 201.0 IMU Health 28.5 22.8 12.0 (47.5) PLife REIT 70.4 73.7 73.6 (0.2) Others (16.1) (28.4) (20.4) (28.3) Eliminations (52.3) (53.0) (53.3) 0.4 Depreciation & amortisation (324.2) (325.4) (354.9) 9.1 Other operating income 105.6 158.5 295.8 86.6 Finance cost^ (288.6) (217.4) (375.6) 72.8 Finance income^ 72.7 58.2 112.9 94.0 Associates and JV 1.6 (3.6) 5.6 (257.6) Pretax profit (257.4) (232.0) 396.0 (270.7) Taxation (109.3) (0.1) (86.8) NM Minority interest 46.9 111.5 0.8 (99.3) Net profit (319.8) (120.6) 310.0 (356.9) EPS (sen) (3.9) (1.6) 3.3 (300.0) Core net profit 189.4 (84.2) 238.4 NM EBITDA margin (%) 21 10 24 Parkway Pantai 20 10 24 Acibadem Holdings 23 12 24 IMU Health 42 36 22 Pretax margin (%) (7) (9) 11 Effective tax rate (%) (42) (0) 22 Source : Bursa Malaysia, Kenanga Research Sum-of-parts valuation Basis Multiples (x) Value (RM m) Remarks PPL EV/EBITDA 17.00 29,511 17x which is inline with peers average. Acibadem (60%) EV/EBITDA 16.00 11,434 16x due to uncertain Turkey Lira Fortis (31.1%) Market value 341 Market value IMU EV/EBITDA 11.00 638 Premium to peers due to higher earnings base. International EV/EBITDA 11.00 2,700 In line with peers average. Plife REIT (35.8%) 1,461 Total 46,086 Net debt (6,136) Total 39,949 No of shares (m) 8,769 Target price (RM) 4.56 Source: Kenanga Research PP7004/02/2013(031762) Page 3 of 5 IHH Healthcare Results Note 27 November 2020 Peer Comparison Net Revenue Core Earnings ROE Name Market PER (x) - Core Earnings PBV (x) DivYld Target Last Price Current Growth Growth (%) Cap Shariah (%) Price Rating (RM) Compliant FYE (RM'm) 1-Yr. 2-Yr. 1-Yr. 2-Yr. 1-Yr. 2-Yr. 1-Yr. 1-Yr. 1-Yr. (RM) Hist. Hist. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. HEALTHCARE IHH HEALTHCARE BHD 5.60 49,152 Y 12/2020 -20% 26.7% -30% 43.0% 50.1 75.6 52.8 2.1 2.2 2.9% 0.7% 4.56 UP KPJ HEALTHCARE BERHAD 0.905 3,873 Y 12/2020 -8.7% 5.8% -32% 15.9% 18.8 27.5 23.7 2.1 2.0 7.5% 2.2% 1.00 OP PHARMANIAGA BERHAD 5.57 1,458 Y 12/2020 -2.4% -2.7% 34.6% -4.0% 32.2 23.9 24.9 4.3 3.9 17.1% 2.2% 1.80 UP Source: Bloomberg, Kenanga Research The rest of the page is intentionally left blank PP7004/02/2013(031762) Page 4 of 5 IHH Healthcare Results Note 27 November 2020 Stock Ratings are defined as follows: Stock Recommendations OUTPERFORM : A particular stock’s Expected Total Return is MORE than 10% MARKET PERFORM : A particular stock’s Expected Total Return is WITHIN the range of -5% to 10% UNDERPERFORM : A particular stock’s Expected Total Return is LESS than -5% Sector Recommendations*** OVERWEIGHT : A particular sector’s Expected Total Return is MORE than 10% NEUTRAL : A particular sector’s Expected Total Return is WITHIN the range of -5% to 10% UNDERWEIGHT : A particular sector’s Expected Total Return is LESS than -5% ***Sector recommendations are defined based on market capitalisation weighted average expected total return for stocks under our coverage.