IHH Healthcare - Maybank Kim Eng 2019-07-31: Still In Growth Mode


IHH Healthcare - Still In Growth Mode

Imputing for regulatory risk at Malaysia

  • IHH's share price has gained 7% YTD on stronger y-o-y 1Q19 results. We expect IHH HEALTHCARE BERHAD (SGX:Q0F) to deliver on the turnaround of Fortis and GHK in FY19-20F.
  • Our earnings forecasts are retained. However, given the impending drug price control in Malaysia, we raise our beta assumption to 0.8x (from 0.7x) for our Malaysia DCF. Consequently, our SOP-based Target Price is reduced to MYR6.50 (-4%).
  • Stock trades at 1-year fwd PER of 44x (5-year mean: 46x). BUY.

2Q19E: Expect a stronger quarter

  • IHH's 2Q19 results is scheduled to be released on 30th Aug. We expect IHH’s core net profit to be better q-o-q/YoY (1Q19: MYR188m, 2Q18: MYR257m) on:
    1. organic growth in its Singapore, Malaysia and Turkey ops, and turnaround at Fortis (FORH IN) and GHK;
    2. normalisation of tax rate. To recap, 1Q19 tax rate was high at 93% due to the tax on cash dividend received for the disposal of RHT HEALTH TRUST (SGX:RF1U)’s assets;
    3. minimal forex distortion with SGD having strengthened 1.5% q-o-q as at end-Jun 2019 while Lira has weakened 1% against MYR.

Tackling low hanging fruits at Fortis

  • IHH now owns a 31% stake in Fortis and the open offer for Fortis (raising its stake to 57%) is expected in 3Q19. The ongoing restructuring at Fortis includes:
    1. lowering interest cost via refinancing of existing debt and disposal of non-core assets. In Jul 2019, Fortis disposed its 29% stake in Mauritius-based Medical and Surgical Centre Ltd (MSCL) for MUR394m (or MYR45m);
    2. increasing synergies with IHH Group (i.e. procurement). In the longer term, the management may also unlock the value of Fortis’ diagnostics business via a listing (FY3/19 EBITDA: MYR107m or INR1.81b).

Mild impact from Malaysia’s drug price control

  • We estimate that the sale of pharmaceutical products accounts for c.48% of IHH’s Malaysia revenue. Every 5% lower ASP on all its Malaysia’s pharmaceutical products could reduce the Group’s net profit by 4% in FY20E, based on our sensitivity analysis.
  • That said, IHH can also cushion the margin pressure by raising other non-regulated charges (accommodation, diagnostics).

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-07-31
SGX Stock Analyst Report BUY MAINTAIN BUY 6.50 DOWN 6.800