DBS: IHH Healthcare Bhd – BUY TP $2.55

1Q22 Results Analysis: Off to a good start!

• 1Q22 was a strong start, in line, with rebound in domestic patient revenue partially offset by lower COVID-19 revenue, higher costs and China lockdown 
• Key positives: i) non-COVID revenue is marginally above pre-COVID levels; ii) strong revenue intensity and inpatient volume supported revenue growth; iii) plans to expand laboratories which contribute c.11% currently 
• Key negatives i) medical tourism still soft in 1Q22 expect in Turkey but expect to pickup from 2Q22 with borders reopening ii) Turkey expected to be in hyper-inflationary economy 
• Maintain BUY; TP of RM7.90. Despite potential macroeconomic headwinds, we believe IHH stands to benefit from strong rebound as the world emerges from the pandemic with added booster from the return of medical tourism. Trades at attractive 14x FY22F EV/EBITDA, -1.5 SD of historical range.

1Q22 was a good start with rebound in domestic patient revenue despite slightly lower contributions from COVID-19 services, some impact from higher costs and China lockdown; non-COVID revenue is marginally above pre-COVID levels.  

• 1Q22 net profit grew 31% y-o-y to RM493m. Excluding exceptional items, 1Q22 core profits grew 21% y-o-y to RM407m, in line with our estimates mainly due to higher revenue from a rebound in domestic patient revenue, lower gestation losses from Gleneagles HK, and lower net interest expense from paring down debt, partially offset by higher costs and temporary closure of clinics in China due to the lockdown.
• 1Q22 revenue grew 6% y-o-y to RM4.2bn as all key markets recorded higher y-o-y revenue ranging from 5% to 18% except Turkey (-4%). Excluding COVID-19 related services, we estimated that 1Q22 revenue grew by c.7% y-o-y (COVID-19 related services from key markets is estimated to contribute c.11% of the Group’s revenue). 
• We estimate that 1Q22 revenue (ex-COVID-19 related services) has marginally surpassed that of pre-COVID levels (1Q19).
• 1Q22 EBITDA +4% y-o-y to RM1.0bn mainly from Malaysia (+28%y-o-y), India (+16%) and Gleneagles HK no longer recording gestation losses. Singapore and Turkey & EU EBITDA fell 4% y-o-y mainly due to higher staff cost for COVID-19 projects.
• On q-o-q basis, 4Q21 saw revenue and EBITDA fell 7% and 11% respectively partially due to seasonality and some impact from Omicron wave. Excluding COVID-19 related services, revenue fell 6%.
• 1Q22 EBITDA margins fell 1ppt q-o-q to 24%. All key markets saw lower margins led by Singapore (-5.8ppt) and India (-3.7ppt)
• In 1Q22, IHH writeback another RM4.4m on Gleneagles Chengdu. As such, total impairment would have reduced to RM226m.
• ROE continue to trend upwards to 8.8% vs 8.4% in 4Q21 and 4.5% in 1Q21, which is already above the 5-year target of > 5%.

Key operational highlights.

1. 1Q22 occupancy relatively stable q-o-q, though India and Gleneagles HK were impacted back the Omicron wave; strong revenue intensity in all key markets except Malaysia
2. COVID-19 services -16% q-o-q; Singapore remained high though expect to taper off from 2Q22 onwards.
3. IHH laboratories contribute c.11% of total revenue with a margin of 22% as at 1Q22; has plans to grow via organic expansion and digital transformation
4. Medical tourism was still soft in 1Q22 in all key markets except Turkey which continue to expand; however, we believe it will be stronger from 2Q22 as travel borders reopen

• 1Q22 occupancy remained relatively stable q-o-q; India and Gleneagles HK saw occupancy impacted by the Omicron wave. 1Q22 occupancy remained relatively stable q-o-q except India (-6ppt q-o-q) and Gleneagles HK (-9ppt q-o-q) which was partially impacted by the Omicron wave. 1Q22 inpatient volume in Malaysia (+19%) and Turkey (+11%) increased by double digit y-o-y while Singapore and India fell by 6% and 8% respectively.

• All markets recorded strong revenue intensity except Malaysia. All key markets saw higher revenue intensity particularly from Singapore (+20% y-o-y), Turkey (+20% y-o-y; partly from price increase for inflation), and India (+10% y-o-y) while Malaysia was relatively flat (-1.7% y-o-y). 

• 1Q22 COVID-19 services -16% q-o-q; likely to taper off as the world emerges from the pandemic. Contribution from COVID-19 related services fell 16% q-o-q contributing c.11% of total revenue vs 12% in 4Q21. Singapore remained high at 22% if revenue (29% in 4Q22) while the rest of the key markets has dropped to single digit. Given the reopening globally, we expect COVID-19 services will likely taper from 2Q22 onwards. 

• Gleneagles HK EBITDA breakeven despite the lockdown in 1Q22. Gleneagles HK 1Q22 EBITDA was at breakeven (RM0.1m from RM2.4m in 4Q21), despite the Omicron wave caused a lockdown in HK in 1Q22. We expect normal business will likely pickup as HK progressively returns to normalcy. 

• Turkey’s foreign patients grew marginally to 13% of revenue. Foreign patients were still soft in other countries except Turkey which continue to see foreign patients contribution expand to 14% vs 13% in 4Q21 of Turkey’s YTD revenue. Its European operations continue to expand to 31% vs 28% in 4Q21 and 23% in FY2019 (pre-COVID).    

• IHH Laboratories contribute c.11% of total revenue but EBITDA margin trending lower to 22% due to decline in COVID-19 test revenues. IHH has plans to develop its laboratories platform via organic expansion and digital transformation. For the first time, IHH disclosed its laboratories segmental performance which contributes c.11% of total revenue. 1Q22 EBITDA margin has trended lower to 22% vs 30% and above in FY21 given lower COVID-19 test revenues.

• Turkey classified as a hyper-inflationary economy. Turkey is expected to be classified as a hyper-inflationary economy and will apply IAS29 Financial Reporting in Hyperinflationary Economies in 2Q22. IHH is currently evaluating the impact.

Maintain BUY; TP of RM7.90. We maintain our BUY rating; TP of RM7.90 on IHH. Despite potential macroeconomic headwinds, we believe IHH is poised to benefit from reopening and recovery from the pandemic with potential booster from medical tourism returning with a vengeance. 

IHH currently trades at attractive levels of 14x FY22F EV/EBITDA, at -1.5 std dev. 

More details after the briefing tomorrow.