IHH Healthcare - DBS Research 2022-08-29: Inflection And Rebound

• 2Q22 (ex-MFRS 129) saw strong rebound in IHH Healthcare (SGX:Q0F)'s normal business post reopening, offsetting a significant decline in COVID-19 related services, thus sustaining revenue at high levels. Malaysia saw strong recovery while Turkey saw decline in margins.

Key highlights on IHH Healthcare operations

• 2Q22 occupancy improved 4ppt q-o-q following reopening (both local and foreign patients). All countries saw improvement in occupancy post-reopening except Turkey (-6 ppt q-o-q).
• All markets recorded strong revenue intensity except Malaysia and India. All key markets saw a higher revenue intensity, particularly from Singapore (+23% y-o-y) and Turkey (+16% y-o-y, partly from price increase for inflation) while India and Malaysia saw decline by 15% y-o-y and 7% y-o-y respectively.
• Gleneagles HK contributed a RM5m EBITDA despite the lockdown in 2Q22; progressively opening beds to 300 by year-end. Despite the outbreak of COVID-19 in Hong Kong during 1H22, Gleneagles HK contributed a RM5m EBITDA in 2Q22 vs RM0.1m in 1Q22 and RM2.4m in 4Q21. The ramp-up of the hospital has been progressing well and management will likely open beds to 300 by year-end (from ~200 currently).
• Turkey’s foreign patients grew marginally to 13% of revenue. Turkey continues to see growth in foreign patients with contribution expanded to 14% (vs. 14% in 1Q22 and 13% in 4Q21) of Turkey’s year-to-date revenue. Its European operations continue to expand to 32% (vs. 31% in 1Q22, 28% in 4Q21, and 23% in FY2019 – pre-COVID).
• IHH laboratories’ business normalised with the tapering of COVID-19 testing; revenue was ~31% higher than pre-COVID levels but EBITDA margins fell. IHH Laboratories saw businesses normalise with the decline in COVID testing. While 2Q22 revenue is higher by ~31% vs the pre-COVID level, EBITDA margins fell to 19% vs 25% pre-COVID.
• Medical tourism has returned and should help offset the tapering off COVID-19 related services; we expect this trend could remain strong in the near-term due to pent-up demand
• IHH Healthcare has entered into a definitive agreement for the sale of IMU in Jun’22 for a total enterprise value of RM1.35bn.
• IHH Healthcare continues to expand in Turkey with the purchase of Orthopedia Hospital in Adana on 9 Aug 2022.

Key takeaways from IHH Healthcare's analysts briefing.

• Medical tourism has been returning post-reopening to ~70% of pre-COVID levels.
  • Singapore saw that medical tourism contributed 17% of revenue in 2Q22, ~70% of pre-COVID levels, which was ~25% of revenue. Management expects the trajectory of medical tourism to continue.
  • In Malaysia, medical tourism contributes, ~1.5% of revenue in 2Q22 vs 5% to 6% during pre-COVID. Management believes there is potential to grow medical tourism in Malaysia, especially as travel returns to normal.
• Local patients in Singapore still have room to normalise to pre-COVID levels. While Malaysia has seen a strong recovery in local patients, local patients in Singapore still have room to normalize to pre- COVID levels.
• Despite IHH Laboratories seeing EBITDA margins at below pre-COVID levels, management alluded this to the tapering off of COVID tests and expect margins to normalise once business resumes as usual.
• Potential manageable price increase to pass through some inflation pressures. IHH Healthcare has successfully kept EBITDA margins quite stable despite inflationary pressures, except in Turkey, which has experienced hyperinflation. However, management may review potential price increases to ease cost inflation pressures, similar to other industries. However, price hikes will be made in a measured way.
• Gleneagles HK is ramping up well and expects EBITDA contributions to continue, especially as Hong Kong starts to progressively reopen further.
• China is progressively recovering from COVID. Barring any further lockdown in China, management believes operations in China will likely improve and ramp-up of the new hospitals can return.

IHH Healthcare - Valuation

• We revised our FY22F-FY23F earnings forecast for IHH Healthcare by ~23% to factor in 1H22 impact MFRS129.
• We maintain our BUY rating on IHH Healthcare with target price at RM7.90 / S$2.55, based on an SOP valuation methodology. We applied EV/EBITDA multiples ranging from 10-20x based on its various geographical markets.
• Despite some potential macroeconomic headwinds, we believe IHH Healthcare will continue to ride on the recovery of normal business operations post-reopening. There will still be room to grow with the pent-up demand for medical tourism. In addition, we look forward to the ramp up of Gleneagles HK as the EBITDA has started to contribute positively and we expect the pace to pick up when Hong Kong reopens further.
• IHH Healthcare's share price currently trades at an attractively undemanding valuation of 14x EV/EBITDA, below -1.5 standard deviation of its historical range.