IHH Healthcare Bhd (SGX: Q0F) (KLSE: IHH)  may not be a household name in Singapore but it’s Gleneagles and Mount Elizabeth hospitals are well known medical institutions. 

As a listed entity, IHH’s share price has fallen significantly due to the impact of coronavirus. However, as a medical company, can it benefit from the disease outbreak? 

Business Overview 

IHH is one of the world’s largest healthcare groups by market value. It operates hospitals, medical centres, clinics, and a comprehensive range of ancillary services. Its home markets are Singapore, Malaysia, India, and turkey. The group also has a growing presence in fast-growing markets such as Greater China and Eastern Europe.

IHH’s business comprises three divisions grouped according to brands.

Source: IHH FY2018 annual report

Parkway Pantai operates 61 hospitals throughout Asia. Its subsidiary, Pantai Holdings, runs the Pantai Hospitals in Malaysia. In Singapore, its subsidiary, Parkway Holdings runs Mouth Elizabeth and Gleneagles. It also owns a 31% stake in Fortis, a leading service provider in India, and a 35.7%  stake in Parkway Life REIT. 

Acibadem is Turkey’s leading private healthcare service provider with 22 hospitals in Turkey and Eastern Europe. IHH acquired this company in 2012 and raised its stake to 90% in 2018. 

IMU is IHH’s medical education arm which oversees two higher learning institutions in Malaysia.

For the Financial Year ended Dec 2019, Parkway Pantai contributed the largest revenue share of 72.7% of total sales. Acibadem generated 25.2% of the group’s total revenue. 

2019 Financials 

IHH recorded a revenue growth of 29% in FY 2019. Correspondingly, earnings before interest, tax, depreciation and amortisation increased 34%. The increase was due to sustained natural growth in existing operations and increased capacity in Acibadem Turkey and Gleneagles Hospital Hong Kong.

Source: IHH 4Q 2019 results presentation

Hospitals in each of IHH’s key markets showed a modest increase in patient admission during 4Q 2019. In particular, India’s inpatient figure increased more than 100% due to the acquisition of Fortis Healthcare in late 2018. 

Source: IHH 4Q 2019 results presentation

Past results showed that IHH revenue and pre-tax earnings had been growing healthily from RM7.3 billion and RM1.9 billion respectively. The management attributes this to organic growth in revenue and expansions into new markets. 

IHH’s higher debts arising from acquisition of Fortis Healthcare has increased their gearing to 0.56 times in FY2019. Nevertheless, IHH’s cash still amounts to half of its total borrowings. For a capital-intensive business, this is an acceptable figure. 

Cash Flow

As IHH spends large capital to build new hospitals and purchase medical equipment, investors need to pay close attention to its cash flow. As a case in point, IHH expects to invest RM1.8 billion of capital for its hospital projects in 1Q 2020 alone. 

Source: Shareinvestor.com

As seen from the graph above, IHH’s operating cash flow trend had been stable in the past 6 years, never falling below $600 million and rose as high as $800 million in 2019. 

Dividends

The Board of Directors proposed a dividend of RM4 cents per share. This is a 33% increase from RM3 cents per share paid in both 2017 and 2018. 

Strengths and Opportunities

One of IHH’s strengths is its scale that grants the company stability, brand equity, and access to capital. As one of the world’s largest premium healthcare providers with a wide network across Asia, it has the resources to survive an economic downturn. It also has sufficient financial buffer to tide through new hospitals’ start-up phase that usually incurs losses. Smaller companies would not have the means to outlast revenue slowdown. 

Another key strength of IHH is its brand equity. Gleneagles and Mount Elizabeth are prominent medical institutions well-known internationally, providing treatment to foreign dignitaries and country leaders which appear on the news often. This is a testament to IHH hospitals’ strong brand. 

IHH is also expanding its hospital network to boost treatment capacity. Gleneagles Shanghai is expected to open this year, while Pantai Hospital Ayer Keroh expansion will add 140 more beds. 2 more hospitals are expected to be ready in the next two years, with more in the pipeline. With these new openings, there is a clear path to future revenue growth. 

Source: IHH 4Q 2019 results presentation

Weaknesses Threats

Constructing new hospitals is costly and requires a large upfront investment. Apart from high manpower costs for doctors, medical equipment, supplies, and ancillary services need to be ready before a hospital can open for business. Besides, high marketing expenses would have been incurred to promote the hospital’s services. Hence it is common for new hospitals to have operational losses in the first few years. 

IHH may also face regulatory and legal risks in its acquisition of other healthcare firms. The host country jurisdiction may block the takeover to prevent strategic medical assets from being owned by a foreign entity. It could also be due to ownership tussle between new major shareholders and the selling shareholder, as in the case of IHH’s takeover of Fortis healthcare. 

Major Shareholder

IHH’s largest shareholder is Mitsui & Co. Ltd, one of Japan’s major trading companies with interests in chemicals, energy, machinery, and infrastructure. It owns a stake of close to 33%. 

The second and third largest shareholders are Malaysia’s Khazanah Nasional Bhd and Employees Providend Fund with 26% and 7.5% ownership respectively. 

These prominent major shareholders including sovereign wealth funds and large institutional firms speak volume about the company’s stability. 

Conclusion

Based on an earnings per share of RM5.28 cents and a share price of S$1.69, IHH is trading at a price-earnings ratio of 97 (S$1 : RM3.03). Compare this to Raffles Medical Group’s price-earnings ratio of 23, that might be a steep price to pay. 

While healthcare is a defensive sector with growing demand due to rising disposable income, does this make IHH a good investment? This is what investors need to assess carefully, taking into account the company’s financials, growth prospects, and management capability.  

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