Investment Highlights

• We maintain BUY on IHH Healthcare (IHH) with an unchanged DCF-derived fair value (FV) of RM6.49/share. 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.

• Our forecasts are maintained following a result briefing yesterday. These are the salient highlights:

• Going into 2023F and beyond, the primary growth driver stems from the expansion of the group’s bed capacity in the key regions of Malaysia, India and Turkiye.

• IHH guided that its Malaysian operations will add 600-700 beds over the next 2-3 years, representing a CAGR of 7.5%- 11.5% (vs 5-year CAGR of 4.5%). For Indian operations, IHH will expand additional 1,200-1,500 beds in 2023-25, a CAGR of 7.8%-9.6% (vs a flat 3-year CAGR).

• Acibadem will experience both organic and inorganic expansions. With recent acquisitions of 52-bedded Ortopedia in Aug 2022 and 340-bedded Kent Health Group in Feb 2023, as well as the opening of 280-bedded Acibadem Atasehir in 3QCY22 and a new Acibadem Kartal with 200+ beds to be operational by 2023, Turkish bed capacity will increase by 6% in 2023 (vs 5-year CAGR of 4%).

• We positively view the re-ignition of IHH’s organic/inorganic growth engine, as this could assist in sustaining the group’s long-term development trajectory, as opposed to relying primarily on the recovery of overseas and domestic inpatient admissions (IA). Notably, foreign IA share of revenue has recovered to pre-Covid levels with Singapore at 25% (at parity to pre-pandemic) and Malaysia at 6%-7% (vs 5% in prepandemic).

• Separately, IHH anticipates that the revenue contribution from foreign IA could surpass pre-Covid level given the continued strong influx of foreign patients. We view this positively since foreign IA typically generates a 20%-25% higher revenue/IA than the domestic patients.

• For Singaporean operations, a slower recovery of IA was mainly due to the ongoing nurse shortages, which constrained the utilisation of bed capacity. Looking forward, IHH guided that staff shortages could be resolved within 3 months.

• For Acibadem’s operations, IHH re-emphasised that the recent 7.7-7.8-maginitude earthquakes happened in earlyFeb 2023 had no impact.

• On a positive note, Acibadem’s 4QFY22 EBITDA margin improved to 25.1% from 19.3% in 3QFY22. This was mainly attributed to increased blended pricing structure, higher share of medical tourism and a decline in energy costs in 4QFY22 from the 2022 peak in 3QFY22. Acibadem's long-term EBITDA margin should be 24%- 25%.

• The recent disposal of Gleneagles Hospital in 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 was operational in early 2023, to reduce ongoing losses.

• Despite the resignation of Managing Director (MD) and Chief Executive Officer (CEO) Dr Kelvin Loh on 22 Feb 2023, IHH stated that initiatives he developed will be maintained.

• To recap, Loh was appointed as MD and CEO of IHH in early-Jan 2020 and spearheaded strategies to double ROE in 2020-2024 through (a) pursuing a geographical cluster plan for growth, (b) asset divestments and recycling for greater capital efficiency, and (c) cost savings via global procurement. We have been favourable on these strategies as a higher ROE typically leads to a higher P/BV, which could catalyse a revaluation for IHH from its 5-year average P/BV of 2.0x.

• We continue to favour IHH for (a) potentially higher revenue share from foreign IA, which typically commands a higher revenue/IA than domestic patients, (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, and (c) strategies to improve ROE, which could lead to a revaluation for IHH.

• The stock currently trades at a compelling FY23F PB of 1.6x – 20% discount to its 5-year average of 2.0x.

Source: AmInvest Research - 2 Mar 2023