IHH Healthcare - DBS Research 2020-08-28: Darkest Before Dawn

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IHH HEALTHCARE BERHAD (SGX:Q0F)

IHH Healthcare - Darkest Before Dawn

• IHH Healthcare (SGX:Q0F)'s 1H20 headline net loss of RM440m, impacted by COVID- 19 especially in 2Q20.
• 1H20 core net profit of RM105m, 2Q20 core net losses of RM84m; 1H20 EBITDA fell 37% y-o-y to RM1b.
• Good recovery momentum from domestic patients from June onwards; SG & MY recorded volumes close to 80% of pre-COVID-19 levels; India achieved EBITDA breakeven in June.
• Key operational highlights;
  1. Foreign patients continue to be impacted, except in Turkey where borders reopened on 12 June; expect recovery with more relaxation of travel restrictions,
  2. Gleneagles HK occupancy and EBITDA losses maintained q-o-q.

2Q20 saw the worst impact of COVID-19; recorded core net loss of RM84m.

• IHH Healthcare’s 1H20 headline net loss of RM440m (vs net profit of RM275m in 1H19) was below our estimates. It was most impacted by;
  1. the COVID- 19 pandemic in most of its markets in April/May during the lockdown /Circuit Breaker and,
  2. impairment loss of RM400m on Global Hospital, India recognised in 1Q20.
• Excluding exceptional items, 1H20 core profits fell 75% y-o-y to RM105m as 2Q20 recorded core losses of RM84m due to the COVID-19 pandemic.
• IHH Healthcare's 1H20 revenue fell 16% y-o-y to RM6bn as all markets recorded lower revenue and patient volumes. Local patients postponed non-urgent and non-essential treatments, and foreign patients were impacted by travel restrictions. The larger decline came from India (- 28% y-o-y), Turkey (-16% y-o-y; partly impacted by depreciation of the Turkish Lira (TRY)), and Singapore (- 13%).
• Similarly, 1H20 earnings before interest, taxes, depreciation and amortization (EBITDA) fell 37% y-o-y to RM1bn as all markets were impacted, especially India (RM4.4m loss vs RM144m profit in 1H19). Losses from North Asia doubled mainly due to gestation losses from Gleneagles HK and Gleneagles Chengdu, Turkey (-31% y-o-y) and Singapore (-20% y-o-y).
• 2Q20 recorded a headline net loss of RM121m (vs RM185m net profit in 2Q19) due to the COVID-19 pandemic and recorded a core net loss of RM84m (vs RM240m core net profit in 2Q19).
• 2Q20 revenue fell -30% y-o-y to RM2.6b mainly from India (-49% y-o-y), Turkey (-31% y-o-y; partly due to decline in currency) and Singapore (-24% y-o-y).
• 2Q20 EBITDA fell -65% y-o-y to RM268m (vs RM774m in 2Q19). Markets which saw a bigger impact included India (EBITDA loss of RM73m vs RM75m in 2Q19), North Asia (losses widened to RM49m vs RM30m in 2Q19), Turkey (-60% y-o-y), and Malaysia (-56% y-o-y).
• 2Q20 EBITDA margins (ex-PLife REIT) contracted to 9.8% (vs 20.4% in 1Q20 and 19.5% in 2Q19). Aside from loss making markets like India and North Asia, margins from Malaysia and Turkey fell the most c.10 ppt q-o-q as Singapore was partly supported by government measures (12% in 2Q20).
• On 14 August, IHH Healthcare completed the acquisition of Prince Court Medical Centre for RM1bn. Debt covenants remains healthy post-acquisition.

Key Operational Highlights

Despite the worst seen in April/May when occupancies fell to 30% - 55%, good recovery momentum was seen in June with some markets recording volumes close to 80% of pre-COVID-19 levels.

• Despite the worst seen in Apri/May when occupancies fell to 30% - 55%, occupancies recovered to 46% to 61% in June on strong rebound from local patient volumes and turned into a net profit (India achieved breakeven in June). In Singapore and Malaysia, volumes have returned close to 80% of pre-COVID-19 levels.

Foreign patients in all markets (except Turkey) are still impacted due to travel restrictions that have yet to be lifted.

• Foreign markets remain affected by travel restrictions in most countries that have yet to be lifted. In Turkey, foreign patients contributed 10% of its total revenue in 2Q20 (vs 16% in FY19). Volumes have recovered since borders were reopened on 12 June. IHH Healthcare’s management is expecting progressive recovery with the relaxation of travel restrictions and more “travel bubbles” being formed.

Gleneagles HK occupancy maintained q-o-q at 55%; EBITDA losses flat.

• Gleneagles HK’s maintained its occupancy q-o-q in 2Q20 at 55% and EBITDA loss of c.RM40m (vs RM49.4m in 4Q19 and RM34.5m in 2Q19).
• North Asia continues to be impacted by gestation losses but existing operations have turned EBITDA positive q-o-q. North Asia continues to be impacted by gestation losses, mainly from Gleneagles HK and Gleneagles Chengdu (c.RM9m). However, IHH Healthcare’s existing operations have turned EBITDA positive q-o-q.

Further reduction on non-TRY debt exposure.

• IHH Healthcare’s management has successfully reduced its non-TRY debt further to EUR$152m to-date (including EUR82m of finance leases of equipment) vs EUR$183m as at March, down from EUR$227m as at December 2019. Repayment of loans of EUR25m were made in July/ August.

Maintain BUY, Target Price of RM6.15.

• We maintain our BUY rating and target price (TP) of RM6.15. With IHH Healthcare currently trading at 17x forward enterprise value (EV)/EBITDA, close to 1.5SD (standard deviation) below its historical average, we believe that its valuation is attractive to ride on post-reopening recovery and relaxation of travel restrictions. The worst could be over after 2Q20.
• 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 into its next phase of growth. IHH’s medium-term outlook is bright while it rides out its near-term headwinds and gestation period for the new hospitals.
• In addition, with potentially strong platforms in India and China, IHH Healthcare now has exposure to the two largest economies in Asia with the strongest growth prospects 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. quicker-than-expected recovery from the COVID-19 pandemic,
  2. Gleneagles HK turning EBITDA positive and shorter-than-expected gestation period from other new hospitals,
  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/ 2020-08-28

SGX Stock Analyst Report BUY MAINTAIN BUY 6.150 SAME 6.150