Equity Analysis /
Sri Lanka

Asiri Hospitals Holdings: 1Q FY23 - Demand to recover in 2H; bottom line to face pressure

  • Price increases support inpatient revenues; volume recovery in 2H

  • Margins decline in 1Q; we expect an improvement in 2H FY23E

  • We use a 3-stage DCF and arrive at a fair value of LKR 30.00/share. HOLD.

Asia Securities
30 September 2022
Published byAsia Securities

We use a 3-stage DCF valuation for ASIR and downgrade to HOLD with a revised TP of LKR 30.00/share (+7.5% upside; +9.7% TSR). ASIR reported an EPS of LKR 0.32 for 1Q FY23 (-58.8% QoQ; -35.0% YoY). Looking ahead, we expect near term demand pressures witnessed in 1Q to ease off while margins improve from current levels. However, a sharp pickup in interest costs looks to pressure the bottom line in the near term. HOLD.

Price increases support inpatient revenues; volume recovery in 2H

Group revenues of LKR 5.4bn were down 4.9% QoQ (+13.6% YoY). According to our estimates, inpatient revenues accounted for LKR 3.5bn up mid-single digits QoQ. 1) Higher revenue/bed day due to price increases offset 2) declining occupancy levels across hospitals. 1Q saw significant demand pressures with 1) fuel shortages impacting mobility and 2) tighter disposable incomes impacting demand for elective healthcare. Looking at 2Q FY23E, fuel shortages worsened in July but have eased off since; accordingly we expect some normalisation of demand over the rest of the quarter. However, we expect discretionary healthcare spending to remain pressured in the near term followed by a recovery in 2H FY23E. ASIR’s regional presence is a key positive as the state healthcare sector faces significant operating constraints amid medicine shortages. Among the listed healthcare providers, ASIR is best positioned to capitalise on a spillover of demand from the state sector to the private sector.

OPD and diagnostics revenues decline QoQ; recovery from 2Q FY23E

Estimated revenues from diagnostics and outpatient (OPD) services of LKR 1.9bn were down sharply QoQ. This decline was in line with peers such as LHCL. Given 1) their discretionary nature and 2) availability of more accessible alternatives (for OPD consulting), we believe these services were most impacted by demand pressures during 1Q. We expect 1) price growth and improving mobility to support revenues in the near term while 2) improving economic conditions lead to a pickup in volumes during 2H FY23E.

Margins decline in 1Q; we expect an improvement in 2H FY23E

Group EBIT margins of 19.8% were down 6.8pp QoQ (-0.4pp YoY). Despite price increases taken, rising cost pressures and lower fixed cost absorption impacted margins. We expect some additional margin pressure in 2Q FY23E as medical suppliers increases prices to adjust for FX depreciation and fuel/electricity tariff hikes come into effect. This will be followed by an improvement in 2H FY23E as volumes improve and pressure on operating costs eases.

We use a 3-stage DCF and arrive at a fair value of LKR 30.00/share. HOLD.

ASIR is poised to continue its robust growth trajectory from 2H FY23E. We remain positive on the group’s prospects; however, note that its exposure to short term variable rate debt and related party lending increased sharply in 1Q. We note that ASIR’s parent company SHL is also highly leveraged. Amid a sharp rise in interest rates, interest costs in 1Q were up 93.7% QoQ to LKR 761mn. We use a 3-stage DCF valuation to reflect the uncertain macro environment and arrive at a fair value of LKR 30.00/share (+7.5% upside; +9.7% TSR). We downgrade to HOLD pending further clarity on ASIR’s financing arrangements.