• Maintain BUY and MYR6.80 TP (SOP), 13% upside with c.2% yield. IHH Healthcare’s 2Q23 core earnings were flattish YoY at MYR315m, bringing 1H23 numbers to 46% and 40% of our and consensus’ estimates. Weakerthan-expected results were mainly due to higher cost of operations and utilities, as well as increased spending on repairs and maintenance. We still like IHH for its reputable regional footprint across key regions and the resilient demand for healthcare services.

• 1H23 core earnings disappointed, due to the consolidation of staff costs for its newly acquired entities, Ortopedia Hospital and Kent Health Group. Depreciation, amortisation, and impairment charges were lower YoY as IHH only recognised a 3-month effect of MFRS 129 for its Turkey division vs a 6-month effect of MFRS 129 in 2Q22, when the Turkish economy was designated as hyperinflationary in Apr 2022. Hospital revenue across key segments posted positive YoY growth, with total hospital and healthcare division revenue growth of 22% and 2% QoQ. Key drivers were mainly the Turkey and Greater China divisions.

• Segmental breakdown. Acibadem grew 40% YoY as Turkey saw patient volume growth of +2% YoY, despite a 47% spike in revenue intensity due to the commencement of operations of Atasehir Hospital (Sep 2022), and acquisitions of Ortopedia hospital (Aug 2022) and Kent Group (Feb 2023). Greater China saw 45% YoY revenue growth, driven by improving operating efficiency of Gleneagles Hong Kong as EBITDA margin expanded 5.7ppts QoQ. The Malaysia segment’s growth was driven by a 16% YoY rise in patient volumes (+4% YoY). Singapore’s bed occupancy rates (BOR) picked up 3ppts YoY to 59%, thanks to IHH’s move to deploy patient care associates (PCAs) to fill the nursing shortage. The Singapore division’s revenue grew 10% YoY from the 11% increase in revenue intensity, offset by a 4% YoY drop in patient admission volumes.

• New MD at the helm. IHH announced the appointment of its new MD, Prem Kumar, and the resignation of its COO Joe Sim (previously the interim MD).

• Maintain earnings estimates, recommendation, and TP, pending the analyst briefing today. Our TP implies 34x FY24F P/E (0.8SD below its 46x 5-year historical average). We incorporated a 0% ESG premium/discount to the intrinsic value as IHH’s ESG score is in line with the country median. We like IHH for its solid execution strategy, reputable regional footprint, and the resilient demand for healthcare services which should provide earnings resilience despite the challenging market environment.

• Key downside risks: Mandatory takeover offer overhang on Fortis, lower-than-expected patient volume/revenue intensity, and higher-than-expected operating costs.

Source: RHB Securities Research - 30 Aug 2023