Undemanding FY21E EV/EBITDA; Maintain BUY

• IHH Healthcare (SGX:Q0F)'s 1Q20 results were below expectations. Poor upcoming 2Q20 is a foregone conclusion and we look forward to earnings recovery from 3Q20 as patients return.
• We lower our FY20E EPS by 10% but maintain our FY21- 22E EPS. Our Target Price of MYR6.05 is intact as it is based on SOP. Maintain Huawei Nova 5T Phone.
• IHH Healthcare trades at FY21E EV/EBITDA of 17x, below its 5-year mean of 21x.

Below Expectations

• Excluding the exceptional items (totalling negative MYR509m), IHH Healthcare's 1Q20 core PATMI was MYR189m (+1% y-o-y, -35% q-o-q) and accounted for 24%/25% of our/street’s full-year forecasts respectively. Results were below our expectation as we expect poorer earnings in 2Q20.
• On a q-o-q basis, the weaker 1Q20 earnings were due to the COVID-19 impact (affected Mar 2020), which resulted in weaker inpatient volumes across all its key markets (-3-13% q-o-q) and weaker EBITDA (-19% q-o-q).

Weaker Earnings Across All Markets

• On a y-o-y basis, 1Q20 EBITDA fell 10% on lower inpatient volumes across all its key markets (SG: -10%, MY: -4%, Turkey: -4%, India: -3%). However, revenue intensity was higher (SG: +11%, MY: +4%, Turkey: +15%, India: flattish) on better case mix.
• Despite the weaker EBITDA, PATMI was flattish y-o-y on a lower tax rate of 42% (1Q19: 93%). To recap, tax expense was high in 1Q19 on the tax on special dividend from its associate RHT Health Trust (SGX:RF1U)’s asset disposal.
• Meanwhile, EBITDA loss at GHK narrowed to MYR40m in 1Q20 (4Q19: MYR50m) as it ramped up its capacity to 200 beds (4Q19: 160 beds) and bed occupancy rate rose to 55% (4Q19: 50%).

Already Seeing Recovery in June

• 2Q20 could be IHH Healthcare’s worst quarter since its listing, as there would be 2 full months of COVID 19-led poor earnings in Apr and May. We understand that bulk of the semi-elective surgery patients have returned in June while the elective surgery patients may only fully return in 2H.
• We lower our FY20E EPS by 10% as we lower our Singapore division earnings on:
  • a lower inpatient volume (-6%);
  • lower EBITDA margin of 30% (-1.5ppt).

Source: Maybank Kim Eng Research - 30 Jun 2020