• Keep BUY, higher MYR6.90 TP (SOP) from MYR6.80, 16% upside, c.2% yield. Despite a sequentially softer 2Q23, IHH Healthcare’s growth should be mainly driven by M&A, a pick-up in medical tourists in its core markets, and inelastic consumer demand for healthcare services. We still like IHH for its solid execution strategy and reputable regional footprint across key regions, driven by strong brand awareness and an affluent client base.

• Key takeaways. We emerged from IHH’s post-results briefing feeling positive, as we like its M&A strategy to drive long-term growth. After completing three acquisitions this year – Kent Health Group (Feb 2023), Ravindranath GE Medical Associates (RGE), and Timberland Medical Centre (Aug 2023) – IHH is on track to resume its shopping spree for potential deals to drive bed capacity by 25% over the next three years. Net gearing ratio is healthy at 0.29x, providing ample balance sheet headroom to fund future acquisitions. Despite a seasonally weaker quarter in 2Q23 (due to Aidil Fitri and the Turkey presidential election), management remained upbeat on the prospects going forward, underpinned by Turkey’s more stable political landscape, robust patient traction in Malaysia and Singapore, and inorganic growth opportunities ahead.

• Easing concerns on nursing shortage. The nursing shortage in its Singapore business is easing, thanks to IHH’s swift efforts to deploy patient care associates (PCA) to reduce the workload of nurses. It also offers feeder bus services to provide transport for nurses residing in Johor Bahru.

• Cost optimisation. IHH laid out several initiatives to streamline its cost base. Cerebral Plus (C+), which was first adopted by Acibadem, is being introduced in over 15 hospitals in Malaysia. The system will enable hospitals to provide better patient experience from arrival to discharge, via shared data across departments in the hospital, and where relevant, across other IHH hospitals nationwide. It also established a centralised procurement strategy which is expected to yield better operating efficiencies.

• Earnings revision and valuation. Post briefing, we lowered 2023 and 2024F earnings by 1% and 5% after tweaking our assumptions for each operating segment. Post revision, our SOP TP is raised to MYR6.90, taking into account the c.20% rally in Fortis’ share price. Our TP implies 37x FY24F P/E, at 0.6SD below its 5-year historical mean of 46x. We ascribed a 0% ESG premium/discount to the intrinsic value, as IHH’s ESG score is in line with the country median.

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

Source: RHB Securities Research - 1 Sept 2023