Investment Highlights

• We retain our HOLD call on IHH Healthcare (IHH) with an unchanged DCF-derived fair value of RM6.89 based on WACC of 7%, terminal growth rate of 3.5% and a 3% premium for our unchanged ESG rating of 4 stars. This implies an FY23F PB of 2.1x.

• Our forecasts are maintained following an analyst briefing last Friday. These are the salient highlights:
  • For the Malaysian market, the declining average revenue per inpatient (revenue intensity) since its peak in 3QFY21 marked a gradual normalisation of highly concentrated acute cases as a result of the return of elective treatments (less acute). Notably, the rate of return of inpatient admissions (IA) outpaced the drop in revenue intensity thanks to deepening medical capabilities at IHH hospitals.
  • For the Singaporean market, the flattish 2QFY22 IA growth was the result of the resurgence of foreign patients balancing out dissipating Covid-related services (i.e. PCR tests). In terms of revenue intensity in 2QFY22, it was higher than the 2019 level despite the contraction in Covid-related services in the quarter.
  • We believe this was mostly driven by more complex surgeries being conducted along with the return of foreign patients. IHH expects this trend to sustain in coming quarters. Notwithstanding the strengthening of the SGD, IHH anticipates the momentum of returning foreign patients in 1HFY22 to continue in 2HFY22.
  • For the Turkish and European markets under Acibadem, 2QFY22 IA still continued its growth of 3% QoQ together with a revenue intensity of 1% notwithstanding 8 holidays in May 2022 for Turkiye. IHH continues to expect the bed occupancy rate (BOR) to remain high in 3QFY22. Consequently, IHH acquired Ortopedia Hospital in 3QFY22 to support its growth.
  • Notably, Acibadem is the only market which registered a significant 8%-point EBITDA margin decline QoQ in 2QFY22 , dragged by dissipating Covid-related services and inflationary pressures. Acibadem said that it can offset inflation with annual price increments i.e. raising the blended average selling price (ASP) by 39% which could offset the inflationary pressure and wage hikes in Jan 2022. This can be achieved without any consequential demand destruction, thanks to the group’s strong customer focus in the high net worth segment.
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  • However, in our view, a single increase in blended ASP in Jan 2022 will not be sufficient to offset continuous cost escalations in subsequent months in Turkiye, as the inflation rate has been continuing its uptrend since the price revision (Exhibit 1). In Turkiye and Europe, rising electricity bills, which are revised with higher frequency, will definitely create a timing mismatch to protect Acibadem’s margins. Hence, we are doubtful of IHH’s ability to sustain its 2QFY22 EBITDA margins of 18.5% in subsequent quarters.
  • We believe the incremental impact of MFRS 129 on 3QFY22 earnings will be limited vs. 2QFY22 as the Turkish inflation rate may grow flattish/low-single digit MoM from Aug 2022 onwards with energy and food inflation receding recently. Based on Bloomberg consensus, Turkiye’s inflation rate is anticipated to be 72.4% in CY2022 vs. 79.6% in Jul 2022 and slow down to 37.2% in 2023.
  • For the Indian market, the 2QFY22 IA recovery was still in a healthy trajectory. The lower revenue intensity (- 14.9%YoY) was mainly due to higher acute cases being admitted in 2QFY21, during which India was heavily impacted by the Delta wave. Barring the superior revenue intensity registered in 2QFY21, the overall revenue intensity trend is going upwards from 2QFY20 (RM6,424) to 2QFY22 (RM8,035) as IHH continuously enhances its medical capabilities.
  • To recap, Gleneagles Hong Kong (GHK) has been recording a positive EBITDA since May 2021 and remains in the positive territory in subsequent quarters. To further strengthen EBITDA, GHK plans to ramp up its bed count in the coming months. For China, the outlook will remain choppy in view of its zero-Covid policy. On a positive note, Parkway Shanghai will be operational in 2HFY22 barring any unforeseen abrupt lockdowns in its locality.
  • IHH’s laboratory services have been experiencing downward trends for both revenue and EBITDA margins due to fading PCR tests amid the normalisation of the pandemic.
  • Going forward, the revenue growth trajectory over the coming quarters will be cemented by a continued recovery in foreign and local patient admissions amid continuous relaxation of lockdown measures and travel restrictions, especially in Malaysia and Singapore. Covid-related services could be fully dissipated in coming quarters, as they only accounted for 3% of IHH’s group revenue in 2QFY22 (vs. c.16% in 2QFY21).
  • Against the backdrop of inflationary pressures, IHH plans to protect its margins by making an appropriate price adjustment in 2HFY22 for its key markets, similar to what has been done in Acibadem. IHH guided that the actual blended cost inflation experienced by IHH in most markets is <5% (except Turkiye), thanks to the adoption of cost optimisation measures.
  • Notably, IHH has exceeded its 2020–2024 target of doubling its ROE, which reached 8.8% in 2QFY22 (vs. 3.8% in 2019). While not only remaining committed in maintaining this target, the group aims to deliver a doubledigit FY23F ROE vs. our forecast of 9.6%. If this materialises, we believe there may be a higher revaluation for IHH as higher ROE tends to be accompanied by a higher PB ratio in the past (Exhibit 2).
• At this juncture, we view the stock as trading at a fair FY23F PB of 2.1x vs its 5-year mean of 2.3x, while dividend yields are unexciting at 2%.

Source: AmInvest Research - 29 Aug 2022