IHH HEALTHCARE BERHAD (SGX:Q0F)
IHH Healthcare - Prospects Are Firmly Intact
- IHH Healthcare (SGX:Q0F) remains committed to growing its ROE despite its recent successes. 2022 should represent a sustained recovery in patient volumes at the expense of COVID-19-related contributions normalising. Despite Turkey facing domestic headwinds, Acibadem is well-positioned to navigate through it with increased foreign contributions and hedged borrowings.
- We continue to like IHH Healthcare for its defensive yet decent growth outlook.
- Maintain BUY and target price of RM7.40.
WHAT’S NEW
- We recently caught up with IHH Healthcare. Here are our key takeaways:
- Lifting the bar. IHH Healthcare’s corporate strategy target to double its ROE over 2020-24 has been achieved two years in. 2019’s ROE was 2.1% and year-to-date, it has averaged 6.3%. Going forward, IHH Healthcare aims to grow its ROE into the mid-teens. Upon the onset of its refreshed strategy, IHH Healthcare has shifted its focus from growing its revenue and EBITDA to being more bottom line-focused. Capital-intensive undertakings such as an enlarged presence in India and entry to Hong Kong have transitioned to internally driven initiatives for IHH Healthcare to meet its goals.
- Underpinned by its refreshed strategy. This is aimed to be achieved through its three-pronged refreshed strategy:
- extracting synergies from IHH Healthcare’s international network, with an aim to achieve RM100m in cost savings through a group procurement synergy programme,
- driving efficient growth across the business by deepening its clusters around key geographical areas and calibrating its asset portfolio by addressing non-core or underperforming assets with a divestiture, and
- developing sustainable platforms through innovation and digitalisation.
- Acibadem’s operations in Turkey should be well insulated from domestic headwinds. Over the past years, the intensity of inpatient revenue has outstripped inflation. Patient volume has been durable due to Acibadem’s high net worth patient base. Meanwhile, Acibadem has hedged 95% of its non-lira denominated debt. Furthermore, it has gradually increased revenue contribution from its foreign patients and European operations to 40% of its year-to-date revenue from 28% in 2017.
- GHK increasingly gestated but may be offset by Gleneagles Shanghai. Gleneagles Hong Kong (GHK), which achieved operational breakeven in May 21 is expected to make further headway as it continues to ramp up services and operational beds. The gradual gestation of GHK should cushion the losses of Gleneagles Shanghai which is due to commence operations in 2H22.
- Timeline on Fortis’ ruling remains uncertain. IHH Healthcare’s open offer for an additional 26% of Fortis shares remains stonewalled. India’s Supreme Court has had a stay order on the offer since Dec 18. This is in spite of the Securities and Exchange Board of India (SEBI) urging the Supreme Court to allow IHH Healthcare to proceed with its open offer. For now, management continues to be sanguine over a favourable outcome but the timeline remains uncertain. IHH Healthcare’s restructuring efforts are limited pending judgement by India’s Supreme Court. That said, operational margins are now in the range of high-teens vs three-year pre-acquisition average of 6.3%.
- Normalisation of COVID-19-related contributions going forward. COVID-19-related contributions such as treatment of COVID-19 patients, administering of vaccination and COVID-19 lab testing should normalise going forward. COVID-19-related contributions provided significant uplift for 3Q21 (18% and 29% of revenue for Malaysia and Singapore respectively). That said, revenue derived from COVID-19 testing and border screening for Singapore should be sustained in the near future. However, the normalising COVID-19-related contributions should be more than offset by a recovery in inpatient volume.
No change to earnings.
- Key downside risks are:
- execution risk,
- shortfall in turning around Fortis, and
- heightened regulatory hurdles.
- Key upside risks are:
- faster-than-expected gestation of GHK, and
- sustained growth in core markets.
- Maintain BUY rating for IHH Healthcare with an SOTP-based target price of RM7.40. Our SOTP-based target price for IHH Healthcare implies 39.8x 2022F P/E, below its historical five-year, 12-month forward P/E of 45x.
- Valuations appear attractive with:
- resilient yet defensive three-year earnings (2020-23) CAGR of 34.7%, and
- IHH Healthcare’s sound track record.
- Earnings drag arising from its North Asian operations has largely diminished while Acibadem’s operations are being increasingly derisked with an increasing foreign patient mix. The diminished risks and attractive valuations far exceed the uncertainty revolving around Fortis and IHH Healthcare’s initial 31% stake that has been brought into question.
- See
Philip Wong
UOB Kay Hian Research
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https://research.uobkayhian.com/
2022-01-26
SGX Stock
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