Investment Highlights

• We retain our HOLD call on IHH Healthcare (IHH) with a lower DCF-derived fair value (FV) of RM6.89 (from an earlier RM7.00) based on WACC of 7%, terminal growth rate of 3.5% and a 3% premium for our unchanged ESG rating of 4 stars.

• The lower fair value solely stems from a 21% cut in FY22F earnings given that IHH’s 1HFY22 core net profit of RM725mil came in below expectations. It accounted for 40% of our earlier FY22F earnings and 44% of consensus amid various headwinds: (a) fading high-margin Covid-related services; (b) inflationary pressure; and (c) rising interest rates. We maintain FY23F–24F earnings for now pending a briefing later today.

• On a YoY basis, IHH registered a slight 2QFY22 revenue growth of 2.4% thanks to the higher inpatient admission in Malaysia (+31%), India (+22%) and Turkey & Europe (+11%), except Singapore (-1%) which was fully offset by a strong growth in revenue per inpatient admission (+23%).

• This was further boosted by rising bed numbers at Gleneagles Hong Kong Hospital plus the addition of Turkey’s Acibadem Bel Medic in July 2021, partially offset by: (a) tapering of Covidrelated services; (b) the disposal of Continental Hospitals in Dec 2021; (c) temporary closure of China-based clinics in Apr– May this year amid a spike in Covid cases in Shanghai; and (d) the lira depreciation in its Turkish operations.

• However, IHH’s 2QFY22 core net profit fell 31.5% YoY to RM318mil in tandem with deteriorating core EBITDA margin (- 11.6% points YoY) due to lower contribution from Covid-related services (which had enjoyed superior EBITDA margins of >25%) and inflationary pressures, particularly higher staff and energy costs.

• On a QoQ basis, IHH similarly posted a stronger 2QFY22 revenue (+5.1%) but a weaker core net profit (-22.1%). The stronger growth was mainly underpinned by higher inpatient admissions recorded for Malaysia (+18%), India (+12%) and Turkey (+3%). Singapore’s inpatient admissions contraction of 1% QoQ was fully offset by higher revenue per patient admission (+8%) despite weaker contribution from Covidrelated services, which eroded 2QFY22 core EBITDA margin (- 6.7% points QoQ) worsened by higher cost pressures.

• In the near term, IHH expects headwinds from declining Covid- 19-related treatments and rising interest rates plus inflating costs of energy and staff, partly mitigated by a recovery in nonCovid medical services to both domestic and foreign patients.

• At this juncture, we do not view the stock’s FY22F PE of 39x as compelling, slightly above its 2-year average of 36x, with an unexciting dividend yield of 1%.

Source: AmInvest Research - 26 Aug 2022