IHH Healthcare - DBS Research 2020-03-02: A Sneeze, Not The Flu

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IHH HEALTHCARE BERHAD (SGX:Q0F)

IHH Healthcare - A Sneeze, Not The Flu

• IHH Healthcare's FY19 core net profit fell -10% y-o-y; revenue and EBITDA rose 34% y-o-y and 23% y-o-y on constant currency.
• Gleneagles Chengdu opened in October 2019; obtained Yibao approval.
• Gleneagles Shanghai’s opening delayed until COVID-19 outbreak stabilises.
• Declared FY19 dividend of 4 Scts.

Maintain BUY, Target Price of RM6.40.

• We maintain our BUY rating on IHH Healthcare (SGX:Q0F) and target price (TP) of RM6.40.
• We remain positive on IHH Healthcare’s growth plans, with a pipeline of new hospitals in China and potential escalation in expansion momentum in India despite near-term headwinds and gestation period. Trading 1 standard deviation (SD) below of its historical average, we believe potential headwinds are priced in.

FY19 results impacted by impairment loss and reversal of deferred tax assets.

• IHH Healthcare FY19 recorded headline net profit of RM552m (vs RM628m in FY18). This was below our estimates, mainly due to impairment loss of RM200m on Global Hospital, India recognised in 4Q19 and RM67.2m reversal of deferred tax assets. The higher net profit was largely due to;
  1. lower foreign exchange (forex) translation losses partly from TRY that stabilised in 9M19 from a sharp depreciation in 3Q18,
  2. partly from forex translation gains following the successful restructuring of non-TRY debt to only c.US$250m,
  3. offset by higher interest expenses (estimated to have more than doubled) from higher borrowings to acquire Fortis Healthcare.
• Excluding exceptional items, core profits fell -10% y-o-y to RM921m mainly due to;
  1. higher net interest expenses,
  2. higher depreciation (+18% y-o-y ex-Malaysian Financial Reporting Standard 16 (MFRS16),
  3. Fortis’ tax expense increased by RM67.2m mainly due to reversal of deferred tax assets in YTD19,
  4. forex losses and fair value exchange losses on forward exchange contracts compared to gains recognised in FY18.
• These were partially mitigated by one-off items including reversal of RM21.8m accrued interest on prior years’ tax payable and RM28.5m of trustee management fee income from disposal of RHT asset.
• FY19 revenue rose +29% y-o-y to RM15b with growth mainly from Fortis. Excluding Fortis, revenue increased +6% y-o-y from all key markets; Singapore (+10% y-o-y), Malaysia (+15% y-o-y), North Asia (+21% y-o-y largely from Gleneagles HK), and Turkey (+2% y-o-y). On constant currency basis, FY19 revenue jumped +34% y-o-y.
• FY19 EBITDA rose +34% y-o-y to RM3.3bn, in line with our and consensus estimates, mainly on good underlying operational performance, contributions from Fortis and impact of MFRS 16 adjustments. EBITDA growth was largely from Singapore (+29% y-o-y), Malaysia (+17% y-o-y), Turkey (+38% y-o-y) and reduced losses from Gleneagles HK (-12% y-o-y), partially offset by start-up losses from Gleneagles Chengdu, estimated at c.RM42.5m. On constant currency basis and ex-MFRS16 impact, EBITDA rose +23% y-o-y.
• IHH Healthcare’s 4Q19 headline net profit fell to RM41m (vs RM509m in 4Q18) mainly from forex translation gains recorded in 4Q18 on TRY rebound and impairment loss of Global Hospital. Core profits fell 15% y-o-y on higher financing costs (+12% y-o-y), Fortis’ reversal of deferred tax assets and forex and fair value forex losses (vs forex gains in 4Q19).
• 4Q19 revenue and EBITDA increased +21% y-o-y and 25% y-o-y respectively; constant currency (ex-MFRS 16) revenue and EBITDA rose +22% y-o-y and 13% y-o-y respectively.
• 4Q19 EBITDA margins (ex-PLife REIT) improved by 1.3p.p q-o-q to 22.9% (vs 21.6% in 3Q19). EBITDA margins (ex-MFRS
• 16) fell by 1.6p.p q-o-q to 20% from 21.5% in FY19. EBITDA margins (ex-new hospitals; ex- PLife REIT) improved q-o-q to 29% (vs 26% in 3Q19 and 26% in 4Q18). The improved EBITDA margins were mainly led by Singapore and Turkey.
• IHH Healthcare declared higher FY19 final dividend of 4Scts (vs 3Scts in FY18).

Key operational highlights

• Gleneagles HK occupancy dipped to 50% (vs 58% in 3Q19) with impact from HK demonstrations.
• 3 key markets continue to deliver growth.
• Gleneagles Chengdu obtained Yibao approvals; Gleneagles Shanghai opening likely to be delayed due to COVID-19.
• New 3-prong strategy from new CEO –
  1. cluster strategy in metro areas,
  2. review of portfolio of assets including divestments and a focus to improve capital returns,
  3. cost savings.

Gleneagles HK EBITDA losses widened on additional staff ramp-up; occupancy fell to 50%; COVID-19 and HK demonstration led to delays in non-essential procedures.

• Gleneagles HK EBITDA losses increased q-o-q to RM49.4m (vs RM39.4m in 3Q19) and RM34.5m in 2Q19 (RM39.4m in 4Q18) mainly due to additional staff to ramp up its clinical services. Occupancy fell to 50% on 150 operational beds vs 58% in 3Q19 and above 60% previously (62% in 2Q19 and 68% in 1Q19). HK demonstrations and the COVID-19 outbreak have partly impacted non-urgent and non-essential procedures and services.

Singapore – continues to deliver good growth.

• In 4Q19 and FY19, revenue from IHH Healthcare’s Singapore operations grew 8% and 10% y-o-y respectively. Both APRIA and inpatient volumes continued to grow moderately at 4.3% y-o-y and 1.6% y-o-y in 4Q19. On a constant currency basis, revenue and EBITDA grew 8% y-o-y and 32% y-o-y respectively while EBITDA margins improved by 5.4p.p. q-o-q partly from the impact of MFRS-16. Foreign patients, comprising 25% of 4Q19 Singapore revenue, was stable q-o-q (vs 26% in 2Q19 and 23% in FY18).

Malaysia – continues to see growth in Indonesian patients.

• 4Q19 and FY19 revenue from IHH Healthcare’s Malaysia operations grew 12% and 15% y-o-y led by higher inpatient volumes (+3.2% y-o-y) and average revenue per inpatient admission (ARPIA) (+7.7% y-o-y). Foreign patients from Indonesia continued to rise. EBITDA margins fell to 27.6% (vs 29.3% in 3Q19, 29.8% in 3Q18).

Acibadem – strong performance led by price adjustments and foreign patients; non-TRY debt stood at EUR226m as at December 2019.

• On a constant currency basis, Acibadem’s 4Q19 and FY19 revenue grew 11% y-o-y and 17% y-o-y respectively while, EBITDA (ex-MFRS 16) grew 23% y-o-y and 30% respectively. The strong growth was partially led by strong growth in ARPIA of 5.4% y-o-y in 4Q19 while inpatient volume was flattish (+0.5%) (mainly due to lower local patients at non-Istanbul hospitals).
• Post restructuring / refinancing, IHH Healthcare’s management has successfully reduced its non-TRY debt to US$226m as at December 2019. This will substantially reduce its exposure to forex translation volatility.

India – Fortis’ EBITDA -28% q-o-q; existing India hospitals EBITDA almost halved q-o-q.

• 4Q19 and FY19 revenue were RM816m and RM3.3b (vs RM357m and RM851m in 4Q18 and FY18 respectively) on maiden contribution from Fortis. Fortis’ EBITDA fell 28% q-o-q. India (ex-Fortis) has turned EBITDA positive since 3Q19 after 3 quarters of consecutive losses as it converts to a more multi-disciplinary focused hospital to reduce concentration risks on a single doctor. However, on a q-o-q basis, India (ex-Fortis) almost halved, albeit marginal.
• Latest update on the suo moto notice served by The Supreme Court to Fortis Healthcare - the next court hearing is on 16 March.

China – Gleneagles Chengdu obtained approval for Yibao in December 2019.

• Gleneagles Chengdu which opened in October 2019 is now operating with 30 beds and 25 doctors. The hospital obtained approval for Yibao in December 2019 and will continue to drive the ramp-up from various channels, ie, corporates, insurance, yibao and private.

Impact of COVID-19.

• Following the outbreak of COVID-19, IHH Healthcare’s management expects more delays in non-essential procedures and slower foreign patient volume, especially from China. IHH Healthcare is expecting COVID-19 to have a bigger impact on hospitals in Asia compared to Turkey. In addition, the construction of Gleneagles Shanghai has been halted following COVID-19. The opening of Gleneagles Shanghai is expected to be delayed until the situation in Shanghai stabilises.

New CEO, new strategy.

• IHH Healthcare’s new chief executive officer (CEO) shared his new 3-prong strategy;
  1. pursue geographical clusters in metro areas to achieve greater economies of scale;
  2. review portfolio which includes divestments of under-performing assets outside of its focus clusters to priorities returns,
  3. leverage international scale to achieve global synergies and drive cost savings.

Maintain BUY, Target Price of RM6.40.

• We maintain our BUY rating and Target Price of RM6.40. We trim our FY20F/21F estimates by 6% to 10% to factor some COVID-19 impact and higher gestation losses from Gleneagles HK.
• IHH Healthcare currently trades at 17x FY20F enterprise value (EV)/EBITDA, close to 1SD below its historical average. We remain positive on IHH Healthcare’s long-term growth plans, with a pipeline of new hospitals in China and a potential escalation of expansion into India. We believe the ramp-up in Gleneagles HK and better economic prospects in home countries such as Malaysia and Singapore could offset some of the start-up losses in China and lead IHH Healthcare into its next phase of growth.
• IHH Healthcare’s medium-term outlook is bright while it rides out its near-term headwinds and gestation period for the new hospitals. In addition, with a potential strong platform in India and another in China, IHH Healthcare now has exposure to the two largest economies in Asia with the highest growth potential in the healthcare sector. We believe this further elevates IHH’s long-term potential.
• See IHH Healthcare Share Price; IHH Healthcare Target Price; IHH Healthcare Analyst Reports; IHH Healthcare Dividend History; IHH Healthcare Announcements; IHH Healthcare Latest News.
• The key catalysts are:
  1. Gleneagles HK to turn EBITDA positive and shorter-than-expected gestation period from other new hospitals,
  2. better-than-expected organic performance,
  3. turnaround in Turkey,
  4. positive developments in new markets such as India.

Rachel Lih Rui TAN DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2020-03-02

SGX Stock Analyst Report BUY MAINTAIN BUY 6.400 SAME 6.400