Investment Highlights

• We maintain BUY on IHH Healthcare (IHH) with a lower DCFderived fair value (FV) of RM6.49/share (from RM6.89/share previously) due to lower earnings expectations. The FV incorporates a 3% premium for our unchanged ESG rating of 4 stars. This implies an FY23F P/BV of 1.9x, close to its 5-year average of 2.0x.

• IHH’s FY22 core net profit of RM1.38bil was largely within our expectation, coming in 4% below our forecast. However, the result missed consensus at 8% below street’s estimates.

• The slight shortfall from our forecast was mostly attributed to higher operating costs (ie. staff and energy costs), weaker Turkish lira (TRY) against MYR, higher post-MFRS 129 depreciation/amortisation and rising net finance costs.

• Hence, we cut net profit forecasts by 18% for FY23F and 10% for FY24F. In addition, we introduce FY25F earnings with a 16% YoY growth, underpinned by the expansion of the group’s bed capacity in key regions – Malaysia, India and Turkiye, as well as normalisation of Acibadem’s EBITDA margin.

• The only FY22 dividend of 7 sen/share has been declared for 4QFY22 (implying a payout of 45%), which slightly missed our earlier forecast of 8 sen/share.

• On a YoY basis, IHH registered a slight 4QFY22 revenue growth of 9%, thanks to higher inpatient admission (IA) in Malaysia (+33%) and Acibadem (+7%). Despite the IA declining YoY in Singapore (-4%) and India (-2%), they were fully offset by a strong growth in revenue/IA with Singapore rising by 29% and India by 12%. Notably, Acibadem’s revenue/IA increased 45% YoY in 4QFY22.

• The stronger revenue 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, and (c) partial lockdowns in China.

• Notably, more acute patients were seeking treatment in Singaporean hospitals, which contributed to the strong YoY growth in its revenue/IA in 4QFY22. Separately, price adjustment to combat inflation were the driving force behind Acibadem's strong YoY growth in revenue/IA.

• However, IHH’s 4QFY22 core net profit fell 23% YoY to RM340mil, primarily due to elevated operational costs (ie. staff and energy costs), TRY depreciation on its Turkish operations, higher post-MFRS 129-impacted depreciation and amortisation, increased net finance costs and a higher effective tax rate of 92% (vs 24% in 4QFY21).

• On a QoQ basis, IHH similarly posted a stronger 4QFY22 core net profit (+8%), in tandem with a 6% revenue growth. The stronger revenue growth was mainly underpinned by higher IA for Acibadem (+20%) coupled with increased revenue/IA for Singapore (+11%), Malaysia (+5%), India (+4%) and Acibadem (+2%), partly offset by weaker IA in Singapore (-3%) and India (-6%).

• We continue to favour IHH for (a) continued recovery of domestic and foreign patient admissions amid continuous relaxation of lockdown measures and travel restrictions, especially in Malaysia and Singapore, and (b) re-ignition of the group’s organic growth engine in 2023 and beyond, which includes expansion of the group’s bed capacity in key regions – Malaysia, India and Turkiye.

• The stock currently trades at a compelling FY23F PB of 1.7x – 15% discount to its 5-year average of 2.0x.

Source: AmInvest Research - 1 Mar 2023