Investment Highlights

• We downgraded IHH Healthcare (IHH) to HOLD from BUY previously after the recent share price improvement that resulted in limited upside from our unchanged DCF-derived fair value (FV) of RM6.28/share. 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.

• Yesterday, IHH entered into a share purchase agreement (SPA) to acquire the entire equity stake in Bedrock Healthcare (BH) for RM245mil on a debt-free basis, to be fully satisfied in cash.

• The acquisition is anticipated to complete by 1HFY2024, subject to regulatory approvals and satisfaction of SPA conditions precedent.

• BH operates an 82-bed hospital, namely Timberland Medical Centre (Timberland) in Kuching, Sarawak and has earmarked a vacant land in central Kuching for the construction of a 200- bed hospital. In FY22, IHH operates a total of 2,731 beds.

• Timberland is a private hospital that has been in operation since 1994. It is situated 10-minute drive away from the Kuching International Airport and 15 minutes from the Central Bus Terminal. Timberland is also branded as one of the top 4 private hospital in Kuching based on KuchingSarawak.com.

• Timberland is currently operating at a 50% occupancy rate and is profitable with an EBITDA of RM19-21mil (0.4%-0.5% of IHH’s FY23F EBITDA) with an EBITDA margin in the high-20s, which is consistent with IHH's Malaysian operations EBITDA margin of 28%-30% in FY20-FY22. Given the relatively small scale of Timberland’s operations, we maintain FY23F-25F earnings.

• We believe Timberland's occupancy rate will increase, primarily due to medical tourism. The Borneo Post reported that AirAsia Indonesia announced a new route between Jakarta and Kuching, which began on 15 June 2023. According to an industry report cited by The Edge Weekly, up to 70% of inbound patients to Malaysia are from Indonesia.

• The Borneo Post reported in Oct 2020 that the new 200-bed hospital will be built at Naim Kuching Paragon, Kuching. The new site is a 10-minute drive from Kuching International Airport, and located near the current hospital. The group will construct and complete the new hospital by 2026 with a capex of RM400mil (or RM2mil/bed).

• In 2019, IHH acquired Prince Court Hospital at an EV/bed of RM3.66mil and EV/EBITDA of 22x. This acquisition of 82-bed Timberland implies a reasonable EV/bed of RM3mil and EV/EBITDA of 12x (which is slightly below IHH’s FY23F EV/EBITDA of 13x). Notably, the deal is inclusive of a vacant land. Hence, we deem the acquisition to be fair.

• In addition, this acquisition signifies IHH's maiden expansion into Sarawak. We view this acquisition as in line with expectations, and have accounted for in our DCF valuation model. IHH’s management has been guiding that the primary growth driver for FY23F-25F will be the expansion of >2K bed capacity in key regions - Malaysia, India and Turkiye.

• IHH’s balance sheet is strong with a FY23F net gearing of 0.24x, which will marginally increase to an estimated 0.25x after this deal.

• We continue to favour IHH for (a) potentially larger revenue share from foreign inpatient admissions (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 fair FY23F P/BV of 1.8x – 10% discount to its 5-year average of 2.0x.

Source: AmInvest Research - 11 Aug 2023