Investment Highlights

• We retain BUY on IHH Healthcare (IHH) with an unchanged DCF derived 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.

• Our forecasts are maintained following an analyst briefing yesterday. These are the salient highlights:
  • Going into 2023, the primary growth driver stems from the expansion of the group’s bed capacity in key regions - Malaysia, India and Turkiye. This will be supported by the continued recovery of domestic and foreign patient admissions amid continuous relaxation of lockdown measures and travel restrictions, especially in Malaysia and Singapore (both achieved 80% of pre-Covid levels in 3QFY22).
  • For the Singaporean operation, a slower recovery of inpatient admissions (IA) was mainly due to nurse shortages (Exhibit 1-4), which constrained the utilisation of bed capacity. Based on IHH’s estimate, this could lead to a 10% revenue loss in FY22F. Looking forward, IHH guided that the staff shortages could be resolved within 6 months.
  • Given Turkiye’s elevated inflation rate, which soared to 86% YoY in October (Exhibit 5), IHH has further increased its blended pricing structure in 2H, after a 39% increase in Jan 2022. Management believes that this can be achieved without any consequential demand destruction, thanks to the group’s strong customer focus in the high net worth market.
  • This move is to offset inflationary pressures and elevated wages in Turkiye. Coupled with rising electricity bills, which are revised with higher frequency, these cost escalations could lead to a timing mismatch vs Acibadem’s sales price revisions, which are implemented to protect margins. Nevertheless, IHH guided Acibadem’s EBITDA margin has bottomed at 19.3% in 3QFY22 and may be recovering to the range of 24-25% as inflation eases.
  • The recent disposal of Gleneagles Hospital Chengdu marked the onset of IHH reviewing its China’s portfolio, given the challenging operational environment. In addition, IHH is looking for solutions (including disposal) for Parkway Shanghai, which is scheduled to be operational in early 2023, with the aim to reduce potential losses.
  • IHH guided that FY22F effective tax rate and beyond will be comparable to 19%-20% in 9MFY22.
• At this juncture, we view the stock trading at an undemanding FY23F P/BV of 1.8x vs. its 5-year mean of 2.3x while dividend yields are decent at 2.2%.

Source: AmInvest Research - 1 Dec 2022