Investment Highlights

• We retain BUY on IHH Healthcare (IHH), with an unchanged DCFderived fair value (FV) of RM6.89. The FV incorporates a 3% premium for our unchanged ESG rating of 4 stars. This implies an FY23F P/BV of 2.3x at parity to its 5-year mean.

• IHH’s 9MFY22 core net profit of RM1,040mil came in within our expectation, accounting for 72% of our FY22F net profit. However, IHH’s 9MFY22 core net profit came in slightly below consensus, accounting for 63% of consensus net profit forecast. As a comparison, 9M accounted for 66%-74% in FY16- 19 core net profit. Hence, we made no changes to our forecasts.

• No interim dividend has been declared in this quarter as IHH historically declare dividend post-4Q results. This remains in line with our FY22F assumption of 8.0 sen/share.

• On a YoY basis, IHH registered a slight 3QFY22 revenue growth of 3.4% thanks to higher inpatient admission (IA) in Malaysia (+57%) and India (+6%). Despite the IA declining YoY in Singapore (-4%) and Acibadem (-1%), they were fully offset by a strong growth in revenue/IA with Singapore rising by 32% and Acibadem by 45%.

• This was further boosted by rising bed numbers at Gleneagles Hong Kong Hospital plus the addition of Turkey’s Acibadem Bel Medic in Jul 2021 and Ortopedia in Aug 2022, partially offset by: (a) tapering of Covid-related services; (b) the disposal of Continental Hospitals in Dec 2021; (c) partial lockdowns in China; and (d) lira depreciation on its Turkish operations.

• Notably, higher acute patients were seeking treatment in Singaporean hospitals, which contributed to the strong growth in its revenue per IA. Separately, price adjustment to combat inflation were the driving force behind Acibadem's strong growth in revenue per IA.

• However, IHH’s 3QFY22 core net profit fell 11% YoY to RM315mil, mainly due to higher net finance costs amid rising interest rate and drawdown of bank loans for redemption of perpetual securities; coupled with higher effective tax rate of 36.8% (vs -9.6% in 3QFY21).

• On a QoQ basis, IHH similarly posted a stronger 3QFY22 revenue (+5.1%) but a flattish core net profit (-0.6%). The sequential revenue growth was mainly underpinned by higher IA for Malaysia (+17%) and India (+5%) coupled with increased revenue per IA for Acibadem (+25%), partly offset by weaker IA in Singapore (-2%) and Turkey (-9%).

• In the near term, IHH expects headwinds from elevated global inflation rate (especially energy prices), rising net finance costs and increased pressure on staff costs amid nursing shortages across most markets, partly mitigated by a recovery in non-Covid medical services to domestic and foreign patients.

• At this juncture, we view the stock trading at an undemanding FY23F P/BV of 2x vs. its 5-year mean of 2.3x while dividend yields are decent at 2.1%.

Source: AmInvest Research - 30 Nov 2022