Investment Highlights

• We maintain our HOLD call on IHH Healthcare (IHH) with a higher fair value (FV) of RM6.29/share (vs. RM5.64/share previously). Our valuation is based on a DCF with a WACC of 7.0% and terminal growth rate of 3.5%. Incorporated in our FV is a 3% price premium for our ESG rating of 4 stars.

• IHH’s 1HFY21 core net profit of RM754.1mil came in above expectations, making up 53% and 69% of our and street forecast respectively.

• We increase our earnings expectations for FY21E/FY22F/FY23F by 7%/22%/41% respectively as it the effects of the group’s cost-saving exercise seem to be kicking in earlier than expected. Additionally, the group’s ability to generate Covid-19-related income is already close to surpassing expectations.

• The group’s recent consolidation of DDRC SRL Diagnostic Services (DDRC SRL) in India and its acquisition of Prince Court Medical Centre (PCMC) are solid drivers of growth. Coupled with the recovery of foreign patient volumes and further expansions into the untapped Eastern European market, we believe that earnings in upcoming years will be far better than previously forecasted.

• Despite a sharp growth in earnings expected in the coming years, we maintain our HOLD call as we believe that its multi-year growth is mostly priced in, as the group is already trading at PE ratios well above 50x FY22F EPS. While the Turkish lira has shown some improvement in the past couple of weeks, Fortis-related concerns may continue to dampen investor confidence.

• Quarterly revenue grew by 20% QoQ and 84% YoY, as the loosening of global lockdowns led to improved inpatient volumes across all countries with elevated revenue per inpatient. The addition of DDRC SRL and PCMC also contributed to the increase in revenue. We do expect a weaker 3Q as the Delta variant has forced multiple economies back into shutdown. 4Q, on the other hand, is expected to perform much stronger.

• Similarly, quarterly EBITDA climbed by 15% QoQ and 314% YoY, while margins fell by 0.9ppt QoQ but rose 13.1ppt YoY. Stronger revenues and other operating income (mostly Covid-19 related) were unable to fully offset higher inventory and staff costs on a QoQ basis.

Source: AmInvest Research - 27 Aug 2021