Investment Highlights

• We maintain BUY on IHH Healthcare (IHH) with a lower DCFderived fair value (FV) of RM6.39/share (from RM6.49/share previously) to account mainly for the 9.6 sen/share special dividend (ex-date on 30 May 2023). The FV incorporates a 3% premium for our unchanged ESG rating of 4 stars. This implies an FY23F P/BV of 1.9x, close to its 5-year average of 2.0x.

• IHH’s 1QFY23 core net profit of RM330mil generally came in below expectations, accounting for 18% of our earlier FY23F earnings and 20% of street’s. As a comparison, 1Q accounted for 21%-23% of FY18-22 core net profit. The deviation was mainly due to higher deferred tax recognised as a result of the adoption of MFRS 129, which led to an increase in carrying value of assets in Turkish operations.

• We anticipate that the deferred tax expenses could normalise in upcoming quarters given a moderating inflation rate in Turkiye. For now, we have not accounted for this in our FY23F- 25F assumptions pending a briefing later today.

• Nevertheless, we tweaked FY23F-25F earnings by 3%/3%/2% to account for IHH’s disposal of IMU Health business which contributed 1% of group revenue and 2% of EBITDA in FY22.

• There was a special dividend of 9.6 sen/share (or 100% of the IMU Health disposal gain of RM845mil). This came in above our earlier DPS forecast of 9.4 sen/share in FY23F, given IHH still have a final dividend to be paid post-4Q result. Therefore, we increase our FY23F DPS assumption to 19 sen/share.

• On a YoY basis, IHH registered a 1QFY23 revenue growth of 24%, thanks to the strong recovery of both local and foreign patients seeking treatment at IHH’s hospitals. This can be seen with higher inpatient admission (IA) in Malaysia (+41%), India (+8%) and Acibadem (+14%).

• Furthermore, the revenue/IA improved materially in both India (+15%) and Acibadem (+44%) as a result of price adjustments to combat recent inflationary pressures.

• IA declined YoY in Singapore (-2%) mainly due to nursing shortages, fully offset by a strong growth in revenue/IA with Singapore rising by 12%, as more acute patients sought treatments in Singaporean operations coupled with price adjustments.

• The stronger revenue was further boosted by the commencement of operations at Atasehir Hospital in Sep 2022 and continuous ramp-up of operations at GHK Hospital, as well as the acquisitions of Ortopedia in Aug 2022 and Kent in Feb 2023.

• However, IHH’s 1QFY23 core net profit fell 19% YoY to RM330mil, primarily due to the recognition of an additional deferred tax of RM203mil.

• Similarly, IHH's 1QFY23 revenue grew by 6% QoQ, while core net profit decreased by 3%. The stronger revenue growth was primarily supported by higher IA (+2%) and revenue/IA (+12%) for Acibadem. However, the sequential decline in 1QFY23 core net profit was primarily attributable to the recognition of relatively higher deferred tax.

• Notably, Singapore’s 1QFY23 EBITDA margin decreased by 1.7ppt QoQ mainly due to reduced revenue/IA, which we believe could normalise in the coming quarters. 1QFY23 EBITDA margins also declined for India (-1.3ppt QoQ) and Acibadem (-4.9ppt QoQ) despite improvements in revenue/IA (+3%-12%).

• We continue to favour IHH for (a) potential higher revenue share from foreign IA, which typically commands a higher revenue/IA than domestic patients, (b) re-ignition of the group’s organic growth engine in 2023F-25F in addition to continued acquisitive growth, which includes >2K bed capacity expansions in key regions – Malaysia, India and Turkiye, and (c) strategies to improve ROE, which could lead to a revaluation for IHH.

• The stock currently trades at a compelling FY23F PB of 1.7x – 15% discount to its 5-year average of 2x.

Source: AmInvest Research - 1 Jun 2023