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.

• Our FY22F-24F earnings are maintained given that Acibadem hospitals were unaffected by the recent 7.7-magnitude earthquake that struck Turkish southeastern parts yesterday.

• According to Bloomberg, one of the most violent earthquakes in the Middle Eastern region hit Turkiye and Syria at 4:17am followed by a second tremblor nearby at 1:24pm yesterday. The earthquakes killed more than 1,600 people in Turkiye and at least 920 in Syria so far, as well as stranding hundreds owing to the collapse of infrastructure and buildings (Exhibit 1).

• The earthquake reached a magnitude of 7.6-7.7, with an epicentre near the Turkish city of Gaziantep (Exhibit 2), which is at the border of Syria.

• Turkiye, located in one of the world’s most active seismic zones amid numerous fault lines, tends to experience earthquakes. Therefore, the Turkish government is experienced in dealing with this kind of disaster.

• However, the current tragedy is the strongest earthquake since the 7.8-magnitude Erzincan earthquake that killed 33,000 people in 1939. In 1999, twin tremors (7.4-magnitude) struck Izmit, Turkiye and killed about 17,479 people. In 2011, a smaller quake (7.2-magnitude) killed nearly 700 people in the eastern city of Van, Turkiye.

• Based on our analysis, Adana Ortopedia Hospital (Adana) is the closest Acibadem hospital to Gaziantep (Exhibit 2). Due to Adana's distance from the epicentre, neither the hospital's operations nor its staff have been affected, as confirmed by our checks with management.

• We do not expect Adana to experience an increase in inpatient admissions, since it is more of a specialty hospital than for emergency care. Other Acibadem hospitals, most of which are located in Istanbul, are too far away to admit injured victims.

• State energy company Botas said that there are some parts of the local gas network were hit, stopping supply to several provinces. On a positive note, these provinces are too far from Acibadem hospitals. Hence, we believe this will not exacerbate the current high energy costs experienced by IHH.

• In the near term, we expect headwinds from elevated global inflation rate (especially high energy prices in Turkiye), 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 for 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 - 7 Feb 2023