Investment Highlights

• We maintained BUY on IHH Healthcare (IHH) with a lower DCFderived fair value (FV) of RM6.28/share (from RM6.39/share previously) to account for 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.

• We reduce FY23F-25F earnings by 8%/5%/5% to account for slower-than-expected recovery of inpatient admissions (IA) for the group’s Singaporean operations as nurse shortages may not be resolved by Jun 2023.

• For Singaporean operations, a slower recovery of IA (20% below pre-Covid era) was mainly due to ongoing nurse shortages, which constrained the utilisation of bed capacity. From the briefing yesterday, we felt that nurse shortages could persist beyond the earlier timeline in Jun 2023, which IHH had guided back in the Dec 2022 briefing.

• For the Indian operations, IHH has an initiative to enhance EBITDA margin from 15% in 1QFY23 to >20% within 12-18 months by disposing non-performing assets. The group guided that margin improvement can be seen in 2QFY23F onwards. For now, we maintain our FY23F-25F EBITDA margin assumption of 17% pending further progress of the exercise.

• The EBITDA margin for Acibadem's operations decreased to 20% in 1QFY23 from 25% in 4QFY22. This was primarily attributable to a one-time donation of RM25mil to earthquake victims and a reduced foreign patient share of total revenue (12% in 1QFY23 vs 15% in FY22). Notably, IHH guided that the group still can pass on higher costs to patients with appropriate bi-annual price adjustments. Once foreign patients return, we believe Acibadem's long-term EBITDA margin should reach 24% to 25%.

• The recent disposal of Gleneagles Hospital in Chengdu marked the onset of IHH reviewing its Chinese portfolio, given the challenging operational environment. In addition, IHH reaffirmed its de-risking strategy in its China-based portfolio (including disposal for Parkway Shanghai, which was operational in early 2023) given no breakeven clarity in the near to medium term.

• Separately, IHH did not provide much clarity in the briefing yesterday on deferred tax guidance for upcoming quarters. Hence, we maintain to our assumptions that deferred tax expenses could normalise in upcoming quarters given a moderating inflation rate in Turkiye.

• In 2023F and beyond, the primary growth driver for IHH 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 beds in FY23F-25F, representing a CAGR of 7% (vs. 5-year CAGR of 5%). For Indian operations, IHH will expand additional 1,500 beds in FY23F-24F, a CAGR of 14% (vs. flat 4-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 3QFY22 and a new Acibadem Kartal with 200+ beds to be operational by FY23F, Turkish bed capacity will increase by 11% in 2023 (vs. 5-year CAGR of 5%).

• We remain optimistic about 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 for Singapore, Malaysia and Turkiye.

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

• We continue to favour IHH for (a) potentially larger 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 2023F-25F in addition to continued acquisitive growth, which includes >2K bed capacity expansions 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 P/BV of 1.7x – 15% discount to its 5-year average of 2.0x.

Source: AmInvest Research - 2 Jun 2023