Investment Highlights

• We maintain HOLD on IHH Healthcare (IHH) with a lower DCFderived fair value (FV) of RM6.22/share (from RM6.28/share previously) due to lower earnings forecasts, which was partly mitigated by rolling forward our base year from FY23F to FY24F. The FV incorporates a 3% premium for our unchanged ESG rating of 4-star. This implies a FY23F P/BV of 1.8x, close to its 5-year average of 2.0x.

• IHH’s 1HFY23 core net profit of RM645mil generally came in below expectations, accounting for 39% of our earlier FY23F earnings and 38% of street’s. As a comparison, 1H accounted for 45%-50% of FY18-22 core net profit. The deviation was mainly due to higher finance costs (+2.1x YoY) despite total financing remaining at RM9.3-9.4bil.

• Hence, we cut FY23F-25F earnings by 23%/26%/26% to account mainly for higher finance costs.

• Surprisingly, the group declared its first interim dividend of 3.5 sen/share in 2QFY23 (implying a payout of 48% that excludes a one-off special DPS of 9.6 sen/share in 1QFY23), given that IHH historically paid dividends in the 4Q result of the past 5 FYs.

• In line with IHH’s weaker-than-expected 1HFY23 core earnings, we deem the ordinary DPS as below our earlier forecast of 19 sen/share. For now, we assume post-4QFY23 DPS will be at smaller magnitude after this interim DPS.

• On a YoY basis, IHH registered a 2QFY23 revenue growth of 7% driven by strong recovery of both local and foreign patients seeking treatments, particularly at IHH’s Malaysian hospitals. This was evidenced by 16% higher inpatient admissions (IA) in Malaysia, whereas other regions experienced either flattish or negative growth.

• Notably, the revenue/IA improved across the board, increasing by 11% in Singapore, 16% in Malaysia, 15% in India and 47% for Acibadem. The substantial increase in Acibadem was mainly attributed to price adjustments made to combat recent hyperinflationary pressures in Turkiye (inflation rate in July was 48%).

• 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 acquisitions of Ortopedia in Aug 2022 and Kent in Feb 2023.

• However, IHH’s 2QFY23 core net profit remained relatively flat YoY at RM315mil, primarily due to a weaker Turkish lira (TRY) against MYR and a rise in finance costs (+2.1x YoY).

• On a QoQ basis, IHH's 2QFY23 revenue declined by 9%, resulting in a 4% decline in core net profit. The weaker QoQ revenue growth was primarily from Acibadem (-35%), which we believe mainly stemmed from lower IA (-8%) and revenue/IA (-4%) in 2QFY23, as well as reduced outpatient treatments. We hope for better clarity from management in a later result briefing.

• IA deteriorated QoQ across the board by 3% in Singapore, 4% in Malaysia and 8% for Acibadem, with the exception of a mild 3% growth for India. This could mean that the post-pandemic trend of patients returning in large numbers to hospitals may be moderating, particularly in 2HFY23.

• The group continued to emphasise its post-pandemic 3-year growth strategies by expanding bed capacity by 25% across Malaysia (600 additional beds), India (1,400 additional beds), Turkey (380 additional beds) and Europe (200 additional beds) while exploring strategic opportunities across Asia and Europe.

• We deem that the stock is trading at a fair FY24F P/BV of 1.8x vs. its 5-year average of 2.0x amid slowing global economic growth prospects.

Source: AmInvest Research - 30 Aug 2023