Malaysia: IHH Health continues to face short term challenges

Tan See Leng, managing director and chief executive, IHH Healthcare

Despite both a jump in profits and addressing the forex issues that have plagued the company in recent years, analysts remain cool on IHH Healthcare’s first quarter figures after it missed consensus estimates.

Profits for Asia’s largest healthcare company rose 56.4% to M$89.5m (US$21.4m) on revenues that were up 27.6% to M$3.6bn.

In a significant move this quarter, IHH paid down US$250m of non-Lira debt for Acibadem Holdings, Turkey’s leading private healthcare provider in which IHH owns a 90% stake, to US$400m. And by 2020, it wants to take it down even further to US$350m.

The group’s figures have been repeatedly hit by lira volatility which is down 14% year-to-date against the US dollar.

“Our decisive actions in Turkey to pare down US$250m of non-Lira debt last month will reduce forex volatility on earnings from the second quarter onwards,” said chief executive Tan See Leng.

This does not remove the risk entirely. Nafisah Azmi at AmInvestment Bank warns of “risks from its Turkish operations due to the volatile lira and deteriorating macroeconomic conditions”.

But this could play in IHH’s favour. Although inpatient admission of Acibadem fell 3% due to seasonality and Q1 revenues there slid 5.5% to M$967.1m, it is not all bad news. Revenue intensity grew 27.2% to in the quarter to M$8,100 due to more complex cases taken, an increase in foreign patients and a price hike imposed on private insurance and out-of-pocket patients to compensate for Turkey’s inflation rate of around 21%.

“More medical tourists are anticipated to visit Turkey for treatment due to its affordability. Foreign patients currently contribute to about 15% of Acibadem’s revenue and they generally pays in US dollars,” according to report from PublicInvest Research.

It was also the first quarterly figures since IHH Healthcare completed its acquisition of Fortis Healthcare, India’s second largest private hospital chain, for US$584.1m.

“In India, we are already working with Fortis’ new leadership to execute its turnaround and are beginning to see some operational improvements to the business,” said Tan.

Here analysts are more upbeat, though there will, inevitably, be teething problems or as Nabil Zaino at MIDF Research puts it “legacy issues”.

Kenanga Research details the problems: “We are concerned over issues at Fortis, including an auditor’s qualified audit report in FY18, which has been carried forward into the quarterly review on 13 Feb 2019, risk of more provisions, lapses in internal controls, which led to regulatory probing, which could well mean execution risk,” it noted.

Again there is a longer term upside here. Other analysts point to the revenue intensity in India which is roughly 15% lower than the group’s other hospitals in India. “We believe that as Fortis grows to be more capable of taking on complex cases, the gap should narrow,” said the research team at PublicInvest Research.

IHH Healthcare shares are down 10.2% year-to-date. They traded pretty much flat after the results were released.