Earnings Report /
Sri Lanka

Asiri Hospitals Holdings: 1Q FY22 - New revenue streams to support growth in FY22E

  • Top-line to benefit from sustained demand for COVID-19 services

  • Better fixed cost absorption and recovering surgical demand to boost margins

  • We maintain our TP of LKR 37.00/share and BUY rating

Asia Securities
3 September 2021
Published byAsia Securities

We maintain our target price of LKR 37.00/share based on a DCF valuation (13.9% WACC). Including a dividend of LKR 1.20/share for FY22E, we derive a total return of +28.6%. BUY. ASIR reported an EPS of LKR 0.50 for 1Q FY22, surpassing our estimates for the quarter. The group recorded its highest quarterly revenue of LKR 4.8bn, up 3.3% QoQ (+76.7% YoY) as surging demand for COVID-19 services offset the negative impact of travel restrictions on traditional sources of revenue. EBIT came in at LKR 966mn with margins down 2.5pp QoQ (+19.0pp YoY) to 20.2%. COVID-19 services generate lower margins, however a higher degree of fixed cost absorption helped mitigate this decline in our view. For FY22E, we expect COVID-19 services to sustain topline supported by a recovery in demand for non-urgent surgeries. We forecast a 2.9pp YoY improvement in EBIT margins to 20.7%. ASIR is currently trading near its lowest P/E band; however, our TP remains at a conservative multiple of 16.3x FY22E EPS. BUY.

Top-line to benefit from sustained demand for COVID-19 services

Revenues surpassed their previous quarter high at LKR 4.8bn, up 3.3% QoQ (+76.7% YoY) on the back of surging demand for COVID-19 services. The pandemic has presented new revenue streams which helped mitigate the impact of travel restrictions on more traditional sources of revenue. ASIR currently operates 4 intermediate care centres (ICCs) for asymptomatic COVID-19 patients, partnering with 3 new hotels during 1Q FY22. It is our understanding that ICCs are operating at full capacity with approx. 800 beds. While this equals the total bed capacity at ASIR’s hospitals, we note that revenue per bed at ICCs remains significantly lower in comparison. Further, ICC revenue is shared between ASIR and the respective hotels. ASIR also operates COVID-19 ICU facilities in 4 of its hospitals for ICC patients who may later require intensive treatment. Meanwhile, growing demand for COVID-19 testing continues; ASIR has entered into agreements with corporate clients for testing services and undertaken capacity expansions in this regard. Looking ahead, management noted that COVID-19 services are expected to mitigate the top-line impact from the ongoing 4th wave. We share management’s view that COVID-19 will have a gradual termination period; as such these services will continue to support top-line over the medium term.

Better fixed cost absorption and recovering surgical demand to boost margins

ASIR recorded gross margins of 43.0% for 1Q FY22, down 2.4pp QoQ (+8.2pp YoY). While COVID-19 testing and treatment services generate lower margins than traditional revenue streams, we believe better fixed cost absorption stemmed the potential margin decline. Looking ahead, management noted that the recently imposed price cap on PCR testing and RATs is not expected to significantly impact margins. Expenses at an operational level remained flat QoQ (-10.9pp YoY) as a percentage of revenues. As such, EBIT came in at LKR 966mn, with margins down 2.5pp QoQ (+19.0pp YoY) to 20.2%. We forecast EBIT margins at 20.7% for FY22E, improving 2.9pp YoY supported by 1) a steady improvement in demand for surgeries and 2) continuing benefits from higher fixed cost absorption.

We maintain our TP of LKR 37.00/share and BUY rating

The stock is down 13.9% YTD and up 48.5% YoY. It is currently trading at 13.1x our FY22E EPS estimate, near its lowest P/E band. We maintain our target price of LKR 37.00/share (+24.6% upside) based on a DCF valuation (13.9% WACC). This corresponds to a conservative P/E multiple of 16.3x FY22E EPS. Including a dividend of LKR 1.20/share for FY22E, we derive a total return of +28.6%. BUY.