IHH’s inpatient occupancy to remain sluggish

Analyst expects the contribution of services related to Covid-19 would increase in 2Q21, in line with the spike in cases


IHH Healthcare Bhd’s inpatient occupancy levels in its second quarter of this year (2Q21) are expected to take a hit from lockdowns in its major markets.

Hong Leong Investment Bank Bhd (HLIB) analyst Gan Huan Wen stated that the private hospital operator’s key markets, Singapore, India, Malaysia and Turkey, have recently tightened lockdown rules to combat rising Covid-19 cases.

“We expect inpatient occupancy rate to remain sluggish going into 2Q21. Despite this, we reckon this will be offset by higher average revenue per inpatient, as patients with serious ailments will highly likely have to seek treatment regardless of lockdown measures,” Gan wrote in a research note yesterday.

He expects the contribution of Covid-19-related services would increase in 2Q21, in line with the spike in Covid-19 cases.

The analyst wrote that IHH’s earnings in 1Q21 had exceeded expectations with a profit after tax and minority interests (PATAMI) of RM339.9 million.

The group’s performance was mainly driven by the stronger than expected surge in average revenue per inpatients in all major markets, except Singapore.

Gan said IHH’s 1Q21 PATAMI accounted for 42.7% and 34.4% of theirs and consensus financial year 2021 forecast (FY21F) respectively.

Its core PATAMI was derived after adjusting for net employment insurance of RM36.1 million.

IHH’s revenue increased 11% year-on-year (YoY), attributable to Covid-19-related services, including screening, laboratory testing and vaccination services.

Gan noted that IHH’s Covid-19related services accounted for 16.5%, 16%, 10% and 8% of revenue in Singapore, India, Malaysia and Turkey respectively in 1Q21.

“While inpatient volumes have yet to fully recover in the majority of IHH’s major markets, higher core PATAMI (+91.5%) was driven by higher revenue per inpatient in most major markets (Singapore: -1.7%, India: +15.2%, Malaysia: +37.6%, Turkey: +28.7%) as patients with more serious and urgent ailments sought treatment at hospitals,” he said.

On a quarter-on-quarter (QoQ) comparison, its revenue grew 4.8% as travel restrictions loosened in a few countries.

Gan said although inpatient admissions increased in India (10.2%) and Turkey (3.9%), its PATAMI had declined 9.4% QoQ due to lesser Ebitda contribution from Singapore (-8.5%) and Malaysia (-13.8%), from lesser inpatient admissions where Singapore reduced by 4.2% and Malaysia by 9.3%.

Gan said IHH suffered losses in the Greater China region due to seasonality associated with the Chinese New Year in 1Q21.

“After adjustments to our forecasts, our take profit (TP) rises from RM5.62 to RM5.90 based on a sum-of-parts (SOP) valuation methodology,” he said.

RHB Investment Bank Bhd (RHB Research) analyst Alan Lim remains optimistic the private healthcare group’s inherent diversified operations will ward off short-term hiccups, and it is in a prime position to ride on the demand recovery as vaccination efforts ramp up globally.

He said valuations are attractive as IHH is currently trading at 15 times FY22F enterprise value (EV)/ Ebitda, representing -2 standard deviation from its five-year mean.

“Covid-19-related services are likely to grow in subsequent quarters as demand for such services remains robust. As of May, IHH has done one million Covid-19 tests,” Lim said in a note yesterday.

He stated IHH’s Indian operations recorded RM24 million in net income, an improvement from 1Q20’s RM513 million net loss due to higher revenue intensity (15% YoY) and contribution from Covid-19related services.

The Malaysian operation’s net income declined 10% YoY due to lower inpatient admission. At the same time, the weaker margins were supported by higher revenue intensity.

IHH’s Turkey and European Union (EU) operations earnings jumped 11.8 times to RM142 million, with the Acibadem Healthcare Group recorded 26.4% in Ebitda margins (1Q20: 22.7%) on higher revenue intensity (29% YoY) and better case-mix.

“Medical tourism volumes recovered to pre-pandemic levels, contributing to 16% of its revenue. IHH continues to reduce its foreign-exchange exposure by cutting its unhedged Turkish lira debt to €24 million (RM121 million) (4Q20: €37 million) and ramping up its EU business (currently EU-denominated revenue makes up 38% of total revenue in this operation),” Gan explained.

RHB Research forecast a higher SOP-derived TP, which is based on 22 times and 10 times FY22F EV/ Ebitda on its hospital operations, as well as IMU Healthcare.

“We tweak upwards our FY21FFY23F earnings by 3%-9% to reflect latest audited financial figures, revise upwards the revenue intensity assumptions (for Turkey, Malaysia and Singapore), but revise downwards the inpatient admission assumption for Malaysia,” he said.