• 1Q20 headline net loss of RM320m due to impairment loss and COVID-19; core profit rose +1% y-o-y.
• IHH Healthcare's 1Q20 revenue was flat y-o-y; EBITDA fell 7% y-o-y on constant currency basis.
• COVID-19 expected to bottom out in April/May; encouraging signs of recovery in June.
• Parkway Shanghai opening postponed to 2021.

IHH's 1Q20 Results Impacted by RM400m Impairment Loss and COVID-19

• IHH Healthcare (SGX:Q0F)’s 1Q20 recorded a headline net loss of RM320m (vs net profit of RM90m in 1Q19). This was below our estimates, mainly due to an impairment loss of RM400m on Global Hospital, India and RM60m on the realisation of foreign currency translation reserve upon substantial liquidation of Khubchandani Hospital. These were partially offset by lower net foreign exchange (forex) translation losses of RM81m (vs RM127m in 1Q19) following the restructuring of Acibadem’s non-Turkish Lira (TRY) loans. Excluding exceptional items, core profit was relatively flat (+1% y-o-y) at RM189m despite the impact of COVID-19 on 1Q20 results, especially in March.
• Despite 1Q20 earnings before interest, tax, depreciation and amortisation (EBITDA) falling 10%, net profit was relatively flat. However, this was mitigated by lower tax expenses (+44% y-o-y) compared to 1Q19 which included tax on cash dividends.
• IHH Healthcare's 1Q20 revenue fell -2% y-o-y to RM3.6m mainly from India (- 8% y-o-y) and North Asia (-12% y-o-y), partially offset by Malaysia (+3% y-o-y). On constant currency basis, revenue was flat.
• 1Q20 EBITDA fell -10% y-o-y to RM734m, impacted by all its key markets; North Asia (EBITDA loss more than doubled to RM67m) Turkey (-7% y-o-y), Singapore (-5% y-o-y) and Malaysia (-8% y-o-y). On constant currency basis and ex- Malaysian Financial Reporting Standards 16 (MFRS 16) impact, EBITDA fell -7% y-o-y.
• 1Q20 EBITDA margins (ex-Parkway Life REIT (SGX:C2PU)) contracted by 2.5p.p q-o-q to 20.4% (vs 22.9% in 4Q19 and 20.6% in 1Q19).
• IHH Healthcare's net gearing increased marginally to 0.17x from 0.15x as at end-FY19. Cash position remains healthy at RM5.4b.

Key Operational Highlights

• IHH Healthcare's 1Q20 patient volumes impacted by COVID-19 but supported by higher revenue per inpatient due to case mix and price increases (Turkey).
• Encouraging signs of recovery in June after patient volumes bottomed out in April/May.
• Gleneagles HK’s occupancy improved despite COVID-19.
• Gleneagles Shanghai opening postponed to 2021.

Gleneagles HK opened more beds (180 to 200 beds); operations improved despite COVID-19.

• Gleneagles HK’s EBITDA losses fell q-o-q to RM40m (vs RM49.4m in 4Q19 but increased y-o-y vs RM33.3m in 1Q19). The y-o-y increase in losses was mainly due to additional staff hired to support the opening of more beds. Gleneagles HK’s operations improved q-o-q despite the COVID-19 pandemic and is operating on 55% occupancy of 200 operational beds (vs 50% on 150 beds in 4Q19).

Singapore: Started the quarter strong but impacted by COVID-19 when restrictions began in March.

• In 1Q20, revenue from IHH Healthcare’s Singapore operations fell 1% y-o-y while EBITDA fell 5% y-o-y. Inpatient volumes fell 10% y-o-y mitigated by 11% y-o-y growth in revenue per inpatient mainly due to case mix. On constant currency basis, revenue and EBITDA fell at similar levels of 1% y-o-y and 5% y-o-y respectively. EBITDA margins were compressed by 6p.p. q-o-q and 1.5p.p y-o-y.
• Foreign patients comprised 21% of Singapore revenue in 1Q20 (vs 25% in 4Q19). According to IHH Healthcare’s management, its Singapore operations started the quarter very strong but this was offset by COVID-19 restrictions which began in March.

Malaysia: Not spared from COVID-19.

• IHH Healthcare's 1Q20 revenue from its Malaysia operations grew 3% but EBITDA fell 8% y-o-y.
• Inpatient volumes fell 3.6% y-o-y but were partially offset by higher revenue per inpatient (+4.2% y-o-y). Foreign patients comprised 5% of Malaysia revenue (vs 6% pre-COVID).
• EBITDA margins fell to 26.9% (vs 27.6% in 4Q19 and 30.1% in 1Q19).

Acibadem: Performance partially supported by price increase; foreign patients relatively stable; non-TRY debt fell further to EUR160m.

• On constant currency basis, Acibadem’s 1Q20 revenue and EBITDA grew 8% y-o-y and 2% y-o-y respectively. This was partially led by strong growth in revenue per inpatient of 14.8% y-o-y in 1Q20 due to blended price adjustments of 13.1% while inpatient volumes fell 4.4% y-o-y. Foreign patients remained quite stable at 14% of Acibadem’s revenue.
• IHH Healthcare’s management successfully reduced its non-TRY debt further to EUR$183m as at March (vs EUR$227m as at December 2019). Since March, this has been further reduced to EUR$160m with repayment from foreign currency receipts. This will substantially reduce the exposure to forex translation volatility which started to take effect in 1Q20.

India: Both Fortis and India (ex-Fortis) impacted by COVID-19.

• 1Q20 revenue fell 8% y-o-y while EBITDA stayed relatively flat (+1% y-o-y). Both Fortis and India (ex-Fortis) operations were impacted by COVID-19. While India (ex-Fortis) remained EBITDA positive in 1Q20, performance could deteriorate in 2Q20 at the peak of the pandemic.
• Latest update on the suo moto notice served by the Supreme Court to Fortis Healthcare: Both Fortis and IHH Healthcare have submitted urgent applications to the Supreme Court but the hearing has been postponed due to COVID-19 and other priorities. The next hearing has been set for 6 July.

China: Parkway Shanghai opening postponed to 2021; Gleneagles Chengdu ramp-up impacted by COVID-19.

• Due to the COVID-19 pandemic, construction works on Parkway Shanghai (previously known as Gleneagles Shanghai) has been halted and its opening has been postponed to next year. The ramp-up of Gleneagles Chengdu has been hampered by the pandemic.

COVID-19 impact on patient volumes expected to peak in 2Q20; encouraging signs of recovery in June.

• Following the COVID-19 outbreak, patient volumes were impacted across all markets. This began in China in January while the rest of the world have been affected since March when the virus started to spread. IHH Healthcare is expecting the impact of COVID-19 to peak in 2Q20 with volumes falling by 40% to 60% in April/ May. However, there was encouraging recovery of local demand in June when countries started to ease restrictions and reopen their economies. IHH Healthcare believes that recovery could be strong with the return of delayed treatments and some complex cases.
• IHH Healthcare has been providing COVID-19 related services in partnership with the public healthcare sector across its geographical locations (especially in Malaysia and Singapore). These services include screening and laboratory testing across all markets, temperature screening at Singapore’s borders, taking in COVID-19 patients decanted from public hospitals in Singapore and taking in non-COVID-10 patients decanted from public hospitals in Malaysia and Hong Kong.
• Accelerated by COVID-19, IHH Healthcare rolled out telemedicine across all key markets and invested in Doctor Anywhere for a bigger telemedicine platform.

Maintain BUY, Lower Target Price to RM6.15

• We maintain our BUY rating on IHH Healthcare but lower our Target Price from RM6.40 to RM6.15 (from SGD2.13 to SGD2.05). We lower our FY20F revenue and EBITDA estimates by 17% to 18% and FY21F revenue and EBITDA estimates by 3% to 5% to factor in the impact of COVID-19. We incorporate the RM400m impairment loss in FY20F and lower our FY20F net profit estimates by 72%.
• With IHH Healthcare currently trading at 17x forward enterprise value (EV)/EBITDA, close to 1.5SD below its historical average, we believe that its valuation is attractive to ride on post-reopening recovery, despite the huge impairment loss and worsening of COVID-19 impact expected on 2Q20 results that may cause near-term overhang on its share price. With encouraging signs of recovery in June, we look forward to the progressive opening of the economy and eventual easing of travel restrictions for foreign patients.
• 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 Healthcare into its next phase of growth.
• IHH Healthcare’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 Healthcare’s long-term potential.
• The key catalysts are:
  1. quicker-than-expected recovery from 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.

Source: DBS Research - 30 Jun 2020