Earnings Report /
Sri Lanka

Asiri Hospitals Holdings: Pressure on earnings to ease from early FY 21 onwards; upgrade to Buy

    Asia Securities
    25 February 2020
    Published byAsia Securities

    We maintain our discounted cash flow valuation based (WACC 11.6%) target price at LKR 23.70/share. Including a dividend of LKR 0.60/share, we arrive at a total return of +21.5%. With the share price having seen a dip recently, we revise our rating to a BUY from a HOLD. ASIR reported a 3Q FY20 net profit to equity shareholders of LKR 496mn (+24.5% YoY) with revenues up 30.6% YoY and EBIT margins improving by 0.2pp YoY. Looking forward, occupancies are running at ~50.0-55.0% in 4Q FY20E. ASIR notes that Kandy hospital is now expected to breakeven by 1Q FY21E, while Galle rebranding work has already been completed in 4Q. As such, we expect stronger profitability from 1Q FY21E onwards. Our key concern continues to remain the high debt levels. With no major capex requirements post Kandy hospital, we expect ASIR to better manage its debt profile post-FY20E. Also, should the proposed corporate tax rates (from 28.0% to 14.0%) pass through, it should add LKR 0.30-0.35/share to our FY21E EPS estimate.

    Kandy hospital to breakeven by 1Q FY21E; 4Q occupancies to normalise

    Group topline was up 30.6% YoY with average group occupancies at ~62.0% vs ~54.0% in 3Q FY19 and ~50.0% in 2Q FY20. Growth was led by Medical and Surgical. We note however, that Colombo hospital occupancies were aided by influenza related cases during the quarter which will not be repeated in 4Q. Kandy hospital also contributed positively to the topline. As per ASIR, Kandy hospital is now expected to breakeven by 1Q FY21E. Galle hospital rebranding efforts have already been completed in 4Q as well. As such, we expect pressure on group bottom-line from higher operational expenses to start easing from 1Q FY21E onwards, albeit offset to some extent from higher interest expenses. On other plans, ASIR is also looking to open an IVF centre in collaboration with the largest fertility care provider in India. While plans are still in early stages, this comes in direct competition with Lanka Hospital who is currently the market leader for IVF treatment in Sri Lanka.

    Borrowings for the quarter reduce; no major future capex post-Kandy

    In 3Q FY20, finance expenses doubled again, owing to the borrowings during 1H FY20. By end 3Q FY20, nearly LKR 3.5bn has been borrowed additionally for Kandy hospital, both for working capital requirements and payments to contractors. As per ASIR’s quarterly report, there is a further ~LKR 570mn to be paid to contractors for the Kandy and Galle hospitals which we believe will result in further borrowings in 4Q as well. Apart from operational capex, there are no significantly large projects planned ahead. Hence, we believe ASIR will be able to better manage its debt profile post FY20E.

    We maintain our TP at LKR 23.70/share and revise our rating to a Buy

    The stock is flat YTD and down ~11.0%, currently trading at 13.6x FY21E earnings, ~31.0% below its 3-yr trading average. We maintain our DCF valuation-based (WACC 11.6%) target price at LKR 23.70/share. Including a dividend of LKR 0.60/share, we derive a total return of +21.5%. With the share price having seen a dip recently, we revise our rating to a BUY from a HOLD. Our key concern for the stock remains the high interest expenses arising from the high debt levels. This should, however, begin to ease from FY21E onwards.