Should You Invest? IHH Healthcare, Owner of Pantai and Gleneagles (Part 2)
You can find part 1 here . Part 2 will cover mainly on the financial performance of IHH Healthcare and financial valuation for IHH. If you don’t feel like reading the whole article, I have prepared an infographic here for you ease of reference.
Impressive revenue growth in the past 5 years, but 2020 has been negatively impacted by Covid-19 pandemic.
Revenue grew at a rate of 7.5% yearly from RM10.0bn in 2016 to RM13.4bn in 2020. IHH experienced its sharpest revenue growth in 2019, with a 29.4% growth to RM14.9bn. This was due mainly to a boom in it’s India operations where it grew from RM0.8bn in 2018 to RM3.3bn in 2019. Even though IHH should theoretically be boosted by the Covid-19 pandemic (more need for medical services), its business was impacted by the movement control restriction where people who needed health services opted to remain home instead and avoid places that might have Covid-19.
Profits have been disappointing as it indicates that IHH is not able to realise improvements in operations and economies of scale
While revenue has been growing healthily in the last 5 years, its profits have not been experiencing the same trend. In 2016, IHH made about RM612m in profits and it further grew to RM970m in 2017. However, its profits in 2018 and 2019 have deteriorated back to RM628m and RM551m respectively. This was mainly affected by an increase in other operating and income tax expense during these two years. Other operating expense normally includes expenses that are not related to sales, and includes rent and utilities, marketing, office expense, operating lease and other fixed costs. As such, profit margins have declined from its peak of 8.7% in 2017 to 2.2% currently, indicating that IHH has a big portion of cost that it has to spend no matter the revenue performance of the company.
There are some concerns over its ability to repay its debt obligations should the need arise, with IHH having higher debt obligations
IHH’s long term debt obligations have been increasing from RM6.1bn in 2017 to RM10.4bn in 2020, with its debt structure increasingly leveraged. Its leverage ( Debt/(Debt + Equity) ) has increased from 22.0% to 32.7% currently, as its increased debt obligations have failed to yield an increase in profits for the company.
IHH is valued at RM5.30, making it fairly valued at this moment. However, it does have some upside to it as it is currently one of the few healthcare companies based in Malaysia
IHH is valued at RM5.30 per share, with an implied price earnings ratio of 265 times. Don’ let the ridiculously high price earnings ratio put you off, as IHH is only one of a handful healthcare companies in Malaysia with overseas exposure. Hence, it is some sort of monopoly in Malaysia. In the past, IHH has traded at ridiculous valuations with a historical average of 186 times. After the MCO, it traded at an average of 540 times price earnings ratio. This valuation is lower than the average target price of analysts out there of RM6.00 per share.
Hence, there is actually some upside to IHH in this regards. The main reason why the price earnings ratio is so high is due to the low earnings per share (EPS) of 2020 financials at only RM0.02 per share. For context, the highest EPS is RM0.12 in 2017. With revenue expected to continue to grow in 2021 and the years after, it is reasonable to expect that its EPS will eventually reach RM0.12 this year or the next. This implies a price earnings ratio of 44 times which doesn’t indicate crazy valuations.
