IHH is acquiring an additional 24.5% stake in the Gleneagles Global Hospitals chain in India for RM415m cash, raising its control to 98.17%. We are mildly positive on the deal that will strengthen IHH’s presence in the Indian market but its impact on earnings is negligible as the India unit has just turned profitable. We maintain our forecasts, TP of RM7.00 and OUTPERFORM call.

Buying out key minority shareholder of India unit. IHH is acquiring an additional 24.5% stake in GE Medical Associates Private Limited (RGE) from its founder Dr. Ravindranath Kancherla and his affiliates for RM415m. The acquisition will raise IHH’s control in the holding company of Gleneagles Global Hospitals from 73.64% to 98.17%. IHH first invested in the unit in 2015. Since then, it has grown into a chain of six hospitals across Hyderabad, Chennai, Bengaluru, and Mumbai, supported by three feeder centres with a capacity of 1,500 beds.

We are mildly positive on the deal that will strengthen IHH’s presence in the Indian market but its impact on earnings is negligible as the India unit has just turned profitable. We gathered that the valuation of the deal is at 16x EV/EBITDA with the asset fetching an EBITDA margin of 10%- 13% and profitable at the bottom line. Driven by procurement synergies and cost efficiency under the cluster strategy, we expect EBITDA margin from RGE to be above 13% (compared to our FY23F EBITDA margin assumption of 22%). The acquisition will marginally increase IHH’s net debt and net gearing of RM4.5b and 0.16x as at 31 Mar 2023 to RM4.9b and 0.18x, respectively.

Outlook. Looking ahead into 2023, we expect IHH’s revenue per inpatient growth of 10%-15% (vs. 18% in 2022 due to low base effect in 2021), inpatient throughput growth of 10%-15% (vs. 10% in 2022) and bed occupancy rate (BOR) of 60%-73% (vs. 56%-70%% in 2022) for its hospitals in Malaysia, Singapore, India and Türkiye. IHH expects double-digit top line growth in Malaysia, while staff shortages at its operations in Singapore are easing. Its operations in Türkiye should pick up as memories of the earlier earthquake fade. Its operations in India are seeing the return of medical tourists from the Middle East and Central Asia while its hospital in Hong Kong should turn profitable by end-2023.

We maintain our forecasts and SoP-TP of RM7.00 (see Page 2). There is no adjustment to TP based on ESG given a 3-star rating as appraised by us (see Page 3).

We continue to like IHH for: (i) its pricing power, as the inelastic demand of healthcare provides it with the ability to pass cost through amidst rising inflation, (ii) the strong recovery in patient throughput, from both domestic and international markets as the pandemic has effectively ended, and (iii) its commanding market position in the private healthcare space with presence in Malaysia, Singapore, Türkiye and Greater China. Reiterate OUTPERFORM.

Key risks to our call include: (i) regulatory risk, (ii) risks associated with overseas operations, and (iii) the lack of political will to roll out a national health insurance scheme.

Source: Kenanga Research - 28 Aug 2023