Since the start of the year, IHH Healthcare’s share price has fallen some 6% while ParkwayLife REIT (PLife REIT), in which IHH has a 35.7% stake, is up almost 8% this year.
Unlike PLife REIT, which has downside protection for its rental income, IHH is subject to the vagaries of the market. IHH has sizeable operations in Turkey through Acibadem, a growing presence in China, and in India where it owns 31% of Fortis Healthcare. IHH planned to acquire an additional 26% in Fortis but that deal is now bogged down in litigation.
In the past 13 years, the three hospitals and Mount Elizabeth Novena in Singapore have benefitted from a growth in medical tourism-related healthcare, and also healthcare in general. After all, the city state, with its ageing population is reportedly home to 207,000 millionaires, based on a Credit Suisse survey.
The year 2020 has indeed been challenging for IHH’s Singapore operations because of Covid-19 and the practical closure of its borders, limiting inbound and medical tourists alike. IHH’s Singapore-based revenue in 1QFY2020 ended March fell 1% y-o-y to RM1 billion ($326.4 million) while Ebitda fell 5% to RM328.2 million. In Singapore, inpatient admissions declined 9.6% y-o-y to 17,278 in 1QFY2020 while revenue intensity increased 10.9% to RM35,236.
“Since the pandemic began in late January in China, patients there have postponed non-essential treatment and visits to hospitals and healthcare facilities. From March, the group also saw lower foreign patient volumes and revenue due to the various travel restrictions implemented across the countries that it operates in,” IHH says in an announcement, referring to its global operations.
The decline in foreign patient volumes was partially mitigated by IHH’s provision of Covid-19-related services in partnership with governments and the public healthcare sector across its geographies. These included the provision of screening services and laboratory testing in Malaysia, Singapore, Turkey, India and Hong Kong; the provision of temperature screening at Singapore’s borders; admission of Covid-19 patients decanted from public hospitals in Singapore as well as acceptance of private walk-in Covid-19 patients at the group’s hospitals in Turkey and India; and acceptance of non-Covid-19 patients decanted from public hospitals including those in Malaysia and Hong Kong.
Fortis and short-term pain
In August 2018, IHH acquired a 31% stake in Fortis by paying US$1.1 billion in a bidding process overseen by an independent board. Last year however, IHH’s mandatory offer to acquire an additional 26% stake in Fortis was stopped by a Supreme Court stay order in India. This was due to objections on a plea filed by Japanese drugmaker Daiichi Sankyo on the previous promoters of Fortis, the Singh brothers. The Supreme Court hearing has been postponed due to Covid-19, including a scheduled hearing on July 6.
In 1QFY2020, IHH announced an impairment loss of RM400 million on Global Hospital, India and RM60 million on the realisation of foreign currency translation reserve upon substantial liquidation of Khubchandani Hospital, Mumbai. Although the impairment was manageable, some market watchers expect further impairments from its Indian unit. As at March 31, gearing was still low at 0.17 times although it is up from 0.15 times as at Dec 31, 2019. The impairment and potential impairments have led analysts to wonder if IHH may divest Mount Elizabeth Novena to PLife REIT.
DBS Research says the impairment caused a 1QFY2020 loss of RM320 million, which was below its estimates. With a “circuit breaker” in Singapore and movement control order in Malaysia for most of 2Q2020, IHH’s 2QFY2020 results are unlikely to show much improvement versus 1QFY2020. “That may cause near-term overhang on its share price,” DBS Research adds.
IHH expects the impact of Covid-19 to have peaked in 2Q2020 with volumes falling by between 40% and 60% in April and May. It sees encouraging recovery of local demand in June when countries started to ease restrictions and reopen their economies. The recovery could be strong, with the return of delayed treatments and some complex cases, DBS Research says.
Similarly, Maybank Investment Banking Research says a “poor upcoming 2QFY2020 is a foregone conclusion and we look forward to earnings recovery from 3QFY2020 as patients return”.
Brighter in the longer term
Once Covid-19 is brought under control, IHH plans to look to China for growth. Parkway Shanghai’s opening has been postponed to 2021 because construction works were halted. Gleneagles Chengdu’s ramp-up was also delayed by Covid-19.
“We remain positive on IHH’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 Hong Kong 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 into its next phase of growth,” DBS Research says.
In 2018, Mitsui acquired a 16% stake in IHH Healthcare. As at April this year, Mitsui owns 32.9% of IHH. According to The Edge Malaysia, Mistui has said IHH will continue to execute the turnaround plan for India-based Fortis and that IHH hopes to deliver a significant quantitative and qualitative improvement in the provision of healthcare services in the South Asian country.
”With potentially strong platforms in India and China, IHH 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’s long-term potential,” DBS Research says.