IHH Healthcare - Maybank Kim Eng 2020-03-02: To Be Cushioned By Lower Tax


IHH Healthcare - To Be Cushioned By Lower Tax

FY19 distorted by high tax rate; Upgrade to BUY

  • IHH Healthcare (SGX:Q0F)'s sequentially stronger 4Q19 results were within expectations.
  • We cut our FY20-21E EPS by 12% p.a. as we impute for COVID 19-led slower operating growth in FY20E and also update for its latest run rates. Post-revision, our FY20E EPS still implies growth of 3% as we assume for its tax rate to normalise to 35% (FY19: 55%).
  • Our SOP-based Target Price is raised to MYR6.30 (+9%) as we roll forward our DCF valuation base year to FY20E and also lower our risk free rate for the group by 50-bps to reflect the lower interest rates.
  • Stock is relatively defensive and trades at 18x 12M forward EV/EBITDA (-1SD to 5-year mean).
  • Upgrade to BUY (from HOLD).

Within expectations

  • Excluding the exceptional items (total negative MYR249m), IHH Healthcare's 4Q19 core PATMI was MYR290m (+43% q-o-q, -15% y-o-y). This brought its FY19 core PATMI to MYR921m (-10% y-o-y), making up 97% and 96% of our and street’s full-year estimates respectively.
  • A first and final DPS of 4sen was declared (FY18: 3sen), implying DPR of 38%. See IHH Healthcare Dividend History.

Strong deliveries by Singapore and Acibadem

  • On constant currency basis and excluding MFRS16 effects, revenue and EBITDA grew 22% and 13% respectively.
  • Key takeaways on the 4Q19 results:
    1. Singapore recorded stronger EBITDA (+19% q-o-q) due to a favourable case mix;
    2. Acibadem also recorded stronger EBITDA (+33% q-o-q) due to seasonality and gain on disposal of medical equipment and government incentives;
    3. Malaysia posted weaker EBITDA (-4% q-o-q) on slightly lower revenue intensity;
    4. Tax rate was exceptionally high at 146% (3Q19: 29%) mainly due to Fortis’ reversal of deferred tax assets.

Still projecting EPS growth in FY20-22E

Impact of COVID-19

  • For Singapore and Malaysia, there could be a drop in foreign patient volumes in 1H20, which account for 25% of Singapore’s revenue and 6% of that of Malaysia. Additionally, patients that were planning for non-essential treatments may also defer it to a later date. In our earnings model, we have factored in a contraction of 6%/2% for FY20E inpatient volume for Singapore/Malaysia respectively. This is followed by an inpatient volume growth of 5% for both countries in FY21E.
  • For GHK, EBITDA loss widened to MYR50m in 4Q19 (3Q19: MYR39m EBITDA loss) on lower occupancy rate of 50% (3Q19: 58%) due to the demonstrations and higher operational cost (added 30 beds to total 160 beds). Due to the COVID-19, GHK has increased its diagnostic/screening offering, which can help mitigate the lower inpatient revenue. In our earnings model, we have pencilled in EBITDA loss of MYR200m for GHK in FY20E and EBITDA breakeven in FY21E.
  • In China, the operation of some of its existing clinics (e.g. Shanghai) has been affected due to the government’s order to close. The construction of its Gleneagles Shanghai hospital has also been halted (target completion was 4Q20). In FY19, its China clinics accounted for just 1% of the group’s total EBITDA.
  • Gleneagles Chengdu was opened on 26 Oct 2019 with just 30 beds (planned total bed capacity: 450 beds). In view of COVID-19, management will be prudent in ramping-up so that it can keep the cost low. In 4Q19, Gleneagles Chengdu reported EBITDA loss of around MYR20m. In our earnings model, we have pencilled in EBITDA loss of MYR100m and MYR60m in FY20E and FY21E respectively.
  • At this juncture, management does not expect any disruption to its Acibadem and India operations. Foreign patients accounts for around 16% of Acibadem’s revenue.

Updates on Fortis

  • To recap, IHH Healthcare has triggered the Mandatory Takeover Offer (MTO) for Fortis when it subscribed for 31% of Fortis’ new shares in Nov 2018. However, India’s Supreme Court has ordered the MTO to be put on hold due to the ongoing investigations on the ex-promoters.
  • In Jan 2019, the Securities and Exchange Board of India (SEBI) has urged the Supreme Court to allow IHH Healthcare to proceed with the MTO as the MTO is mandatory under India’s takeover code. The regulator also added that the subscription of shares by IHH Healthcare was completed before the Supreme Court’s decision to freeze the Fortis-IHH deal in Dec 2018.
  • The next court hearing date is 16th Mar 2020 and IHH Healthcare expects a favourable outcome. In our earnings model, we have already imputed for the acquisition of another 26% Fortis shares in FY20E at an offer price of INR170/shr, which would cost IHH Healthcare a total of MYR1.96b cash.
  • Separately, the findings on the external auditors’ qualified opinion on Fortis’ FY18 audited accounts would be reviewed at Fortis’ board meeting in May 2020.
  • Downside risk to IHH Healthcare is that there could be impairment on the goodwill it recognised for the acquisition of Fortis. A substantial impairment (if any) may lead to a knee-jerk reaction to IHH Healthcare's share price but we believe the share price would recover as the impairment would be treated as an exceptional item.

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-03-02
SGX Stock Analyst Report BUY UPGRADE HOLD 6.30 UP 5.800