IHH venture faces unexpected variable with lira crisis

PETALING JAYA: The surprising weakness in IHH Healthcare Bhd’s share price over the previous week has once again highlighted some of the variables it has to juggle with in its growth strategy.

Apart from having to cope with startup costs from the new hospitals it had opened recently, the company is also now needing to contend with another unanticipated variable – the severely weakened Turkish lira.

This will reduce the amount that is repatriated back to Malaysia when it reports its quarterly earnings.

Turkey is also a country where the company operates in as one of its home markets and the lira continues to hover at very weak levels of 6.2783 to the US dollar, close to when the lira currency crisis crescendoed a month ago in August.

The company declined to comment for this article, and analysts remained cautious about Turkey.

A report in the beginning of the previous week by Affin Hwang Capital Research highlighted IHH’s outlook in Turkey that might see it experiencing sustained losses in ringgit terms due to the sharp depreciation of the lira.

“This is due to the mismatch between the funding currency of its debt in euro, US dollar and operational currency of lira,” it said.

Despite Affin Hwang having maintained its “buy” rating on the stock, IHH tumbled to the lowest levels in almost four years after the report was circulated to its investors and associates.

Technical analysts said this might be the final leg of the downward trend being experienced, and the relative strength index had dipped into the oversold territory following the drop.

Fluctuations in its share price also do not change IHH’s position as one of the main healthcare players in the industry, they noted.

The concerns in Turkey also added to other factors namely the startup costs it has to contend with before being able to break even and before these new hospital additions eventually contribute to its bottom line meaningfully.

Hong Leong Investment Bank (HLIB) Research’s healthcare analyst Sheikh Abdullah told StarBiz that the startup costs pertained to IHH’s new hospitals in Hong Kong: Gleneagles Hong Kong and Chengdu.

“Breakeven periods differ, but the general assumption we are taking into account is any- where between three and five years.

“This would depend on factors such as the location, people demographics and income levels. Greenfields take three to five years to break even, but brownfield acquisitions are normally quicker,” Sheikh said.

“The general rule of thumb is that startup costs for hospitals are around RM1mil a bed. For a 400-500 bed, the hospital would need 2,000 to 2,500 employees and half of this would need to have already been trained. The RM1mil would go towards wages, inventory, consumables, drugs and suppliers,” he pointed out.

In HLIB Research’s report on Aug 29, it said that IHH’s first-half results for the financial year 2018 with core earnings of RM403.9mil made up 44.5% of HLIB’s and 45.8% of consensus expectations.

The research house said this was below expectation and was due to higher finance and start-up costs that were associated with the newly opened hospitals.

On IHH’s Turkey operations, HLIB Research said the company had indicated that it would accelerate its plans to reduce its foreign debt burden by converting its euro and US dollar debt into lira, and reduce the absolute amount outstanding through the disposal of non-core assets.

It pointed out that IHH faced borrowing costs of around 20%-25%, but on the flip side, the weakened lira had seen the hospital group also experiencing an influx of medical tourists, with around 30% of medical tourist volumes coming from private insurance patients.

This is due to the mismatch between the funding currency of its debt in euro, US dollar and operational currency of lira. Affin Hwang Capital Research