Results Analysis: On track to achieve a record breaking year!

  • 9M21 continue to deliver strong results, in line, with contribution from COVID-19 related services, Gleneagles HK contributed maiden positive quarterly EBITDA and rebound in non-COVID businesses (3Q21 revenue ex COVID services was c.9% above pre-COVID levels 
  • Key positives: i) Gleneagles HK contributed maiden positive quarterly EBITDA; ii) strong rebound of non-COVID business seen in India from pent-up demand; iii) 3Q21 ROE continue to improve, above target; iv) appointed as second provider of PCR test on arrival at Changi Airport 
  • Key negatives i) Malaysia and Singapore occupancy is still below pre-COVID levels, ii) impairment on Gleneagles Chengdu, iii) slightly lower EBITDA margins  
  • Maintain BUY; TP of RM7.20. IHH stand ready to support respective government with the rising spread of Omicron variant and stands to benefit if reopening continues when COVID-19 stabilises. Trades at attractive 15x FY22F EV/EBITDA, -1.5 SD of historical range.

9M21 continue to deliver strong results, led by contribution from COVID-19 related services, Gleneagles HK contributed positive EBITDA and strong rebound in non-COVID businesses (3Q21 revenue (ex-COVID services) was c.9% above pre-COVID levels). 

  • IHH recorded strong 9M21 net profit of RM1,409m vs net loss of RM130m in 9M20. Excluding exceptional items, 9M21 core profits improved more than 3 folds y-o-y to RM1,154m, 77%% of our FY21F estimates mainly due to revenue contribution from COVID-19 related services, low base in 9M20 when COVID-19 peaked and contribution from the consolidation of DDRC SRL Diagnostics (from Apr21) and Prince Court Medical Centre (from Sep20).  
  • 9M21 Revenue grew 31% y-o-y to RM12.7bn as all key markets recorded higher y-o-y revenue ranging from 26% to 49%. Excluding COVID-19 related services, we estimated that 9M21 revenue grew by 12% y-o-y (COVID-19 related services from key markets is estimated to contribute c.15% of the Group’s revenue). 
  • We estimate that revenue (ex-COVID-19 related services) is close to pre-COVID levels.
  • 9M21 EBITDA almost doubled to RM3.2bn as all key markets saw strong growth especially India (which recorded RM485m vs RM85m in 9M20), Turkey & EU (+71% y-o-y), and lower gestation losses from Greater China (+55% y-o-y).
  • Similarly, 3Q21 core net profit +49% y-o-y to RM355m . 3Q21 core net profit is 75% above pre-COVID levels (3Q19).
  • On q-o-q basis, 3Q21 saw revenue grew 4% and EBITDA fell 1%. Excluding COVID-19 related services, revenue grew 9%, with strong recovery from non-COVID-19 related businesses especially from India.
  • 3Q21 saw EBITDA margins fell marginally q-o-q to 25% from 26% in 2Q21, mainly due to Singapore which recorded lower margins of 28% vs 34% in 2Q21. The lower margins were due to higher staff costs and lower government grants. The increase in staff costs was mainly due to provision for market and appreciation bonus for staff and higher other operating expenses.   
  • Compared to pre-COVID levels, 3Q21 and 9M21 revenue was 26% and 17% above pre-COVID (vs 2Q19 and 1H19) respectively. However, if we exclude revenue from COVID-19 related services in key markets, 3Q21 and 9M21 revenue is estimated to be 8% above and flat compared to pre-COVID respectively. The strong recovery from non-COVID businesses especially from India (+35% vs 2Q21) seems to suggest strong rebound post the delta variant wave stabilized.  
  • We note that in 3Q21, IHH made a further RM51m impairment on Gleneagles Chengdu on a longer-than-expected ramp-up. Total impairment in 9M21 would be RM241m.
  • Following the strong results, ROE has improved further to 8.2% vs 7.2% in 2Q21 and 4.5% in 1Q21, which is already above the 5-year target of > 5%.

Key operational highlights.

  • 3Q21 occupancy stable q-o-q; India held its occupancy with strong rebound from non-COVID patients while Malaysia and Singapore were still lagging vs pre-COVID
  • Strong revenue intensity in all markets; q-o-q stable patient volumes except India saw a strong jump
  • COVID-19 related services to remain in markets with resurgence of COVID-19; appointed as second provider of PCR tests at Changi Airport and provide PCR test services at Dalaman YDA Airport.
  • Gleneagles HK contributes its maiden positive quarterly EBITDA of RM2.2m in 3Q21
  • 3Q21 occupancy remained relatively stable q-o-q; India held up occupancy with strong rebound from non-COVID patients. 3Q21 occupancy remained relatively stable q-o-q in most key markets. Despite a decline in COVID-19 patients in India, non-COVID 19 patients saw strong rebound with some pent-up demand. Malaysia and Singapore were still below pre-COVID levels (-24% and -11% respectively). 
  • Strong revenue intensity across all key markets offset by decline in inpatient volume in Malaysia and Singapore. All key markets, saw higher revenue intensity particularly from Malaysia (+25% y-o-y), Turkey (+22% y-o-y; partly from price increase for inflation). 3Q21 inpatient volume saw strong y-o-y growth across all key markets except Malaysia and Singapore On a q-o-q, patient volume from all markets were relatively stable except India which saw patient volume increased by 21%.
  • COVID-19 related services to continue in markets with resurgence of COVID-19; appointed as the second provider of PCR tests on arrival at Changi Airport and provide PCR test services at Dalaman YDA Airport . Contribution from COVID-19 related services fell q-o-q contributing 15% of total revenue vs 18% in 2Q21 and 12% in 1Q21. Singapore and Malaysia remained high at 29% and 18% respectively while India has fallen to 7% vs 21% in 2Q21 as the delta variant wave stabilized in 3Q21. IHH continue to support the government in its key markets on COVID-19 efforts. Parkway Laboratory Services has been awarded the contract by Changi Airport Group to be the second provider of PCR tests on arrival from Nov21. In addition, Dalaman YDA Airport Acibadem PCR Laboratory has been operational since 1 June 2021 to perform PCR tests for passengers 24/7.  
  • Gleneagles HK contributes its maiden positive quarterly EBITDA of RM2.2m in 3Q21. Gleneagles HK contributes its maiden positive quarterly EBITDA of RM2.2m in 3Q21. Operational metrics remained stable with occupancy flat q-o-q and revenue intensity improved 2.1% y-o-y.
  • Turkey’s foreign patients was stable at 12% YTD of revenue while it European operations continue to expand. Turkey’s foreign patients contribution remained stable at 12% of Turkey’s YTD revenue, lower than 1Q21 of 16%. Its European operations continue to expand to 28% vs 23% in FY2019 (pre-COVID).    
  • IHH laboratory remains in leadership position in all key markets except India at second largest. In this quarter, IHH highlights its dominant position in the laboratory business within its respective markets. 

Key highlights from results briefing

  • Management remains optimistic on the growth momentum of Gleneagles HK and are potentially looking at breakeven (net income) in FY2023.
  • Acibadem continued to record strong performance and is now contributing positively in both EBITDA and net income level. Discussions are ongoing of the potential of dividend payments from Acibadem, which is a testament that IHH’s investment is progressively showing returns. Could this potentially lead to potential increase in dividend payouts eventually?
  • Construction of Parkway Shanghai is on track and is expected to open in mid to 3Q 2022.
  • Post the expansion of VTL lanes to Indonesia, IHH has seen strong bookings from foreign patients from Indonesia. As such, management expects foreign patients will return on pent-up demand when borders are reopened.
  • Management estimates that there could be a c.RM20m impact when prosperity tax are imposed in Malaysia. In addition, with the tax exemption on foreign sourced income lifted, management expects there could be some marginal increase in tax but do not expect this to be significant.
  • Singapore operations have been resilient, partially supported by COVID-19 related services while Mount Elizabeth Novena has showed resilience performance with little impact from the pandemic. Management does not expect COVID-19 related services will drop-off significantly  as seen in other markets, as IHH continues to support the government in its COVID-19 effort such as COVID test and etc.
  • In portfolio review and optimism, management is focused on expanding its presence in Europe (currently comprises c.30% of Turkey’s revenue) via its cluster strategy and will continue to look for opportunities either via M&A or organic growth.
  • Less well-known, IHH takes leadership in all its key markets in its diagnostic business and will look to expand its capacity especially in Singapore, Malaysia and Turkey.
  • In its portfolio review of its China investment, management acknowledges that China remains an attractive market with high-growth potential. However, given the regulatory restrictions, management is reviewing its business strategy to improve operations to speed up the longer gestation period.

Maintain BUY; TP of RM7.20. We maintain our BUY rating; TP of RM7.20 on IHH. Given its strong 9M21 performance, IHH is on track to achieve a record high earnings. Given the resurgence of the new Omicron variant, IHH stand to be ready to provide healthcare support to the respective government as one of the largest healthcare player in its key markets. In the medium-term, as Singapore progressively reopens its travel borders, we expect medical tourism will return with a vengeance at the start from pent-up demand, similar to the recent strong rebound in non-COVID patients in India.   

IHH currently trades at attractive levels of 15x FY22F EV/EBITDA, close to -1.5 std dev. 

More details after the briefing this morning.