Investment Highlights

• We reiterate HOLD on IHH Healthcare (IHH) with an unchanged DCF-derived fair value (FV) of RM6.22/share, which implies a FY24F P/BV of 1.8x, at parity to its 5-year average of 2.0x, and incorporates a 3% premium due to our unchanged ESG rating of 4-star.

• Post-result briefing, we maintain FY23F-25F earnings, which have already factored in a recovery in inpatient admissions (IA) and EBITDA margin in 3QFY23, as well as higher finance costs for the coming quarters.

• In 2QFY23, IA was lower QoQ by 3% in Singapore, 4% in Malaysia and 8% in Acibadem, mainly attributed to more festive seasons in 2Q ie. Singapore: 4 national holidays in 2Q vs. 3 in 1Q; Malaysia: 8 in 2Q vs 2 in 1Q; Turkiye: 11 in 2Q vs 1 in 1Q. Going into 3QFY23, IHH is confident that IA will be better QoQ across the board based on observations in Jul-Aug.

• Given that 2QFY23 revenue/IA improved QoQ in most of the regions, we believe it will remain at SG$15-17K/IA for Singapore, RM9-11K/IA for Malaysia, INR163-165K/IA for India and TL56-58K/IA for Acibadem in FY23F due to the established brand names of IHH’s hospitals, which provide pricing power and sustainable demand for 2HFY23.

• The 1%-point QoQ decline in IHH’s EBITDA margin to 21.5% was primarily attributed to Malaysian (-3.2%-point) and Acibadem’s (-3.5%-point) operations.

• Malaysian operations witnessed lower IA, which offer higher margin, despite higher revenue, which we believe was primarily due to a volume increase in lower margin outpatient volume.

• In addition to a lower revenue base, Acibadem was impacted by a lower share of high margin foreign patients, i.e., 17% of revenue in 2QFY23 compared to 23% in FY22, as a consequence of the earthquake that occurred in Feb 2023. However, IHH observed that medical tourism recovered from Jul onwards.

• For Indian operations, EBITDA margin did not improve QoQ as guided by IHH in its May results briefing. Instead, it deteriorated by 1%-point, primarily due to a greater proportion of oncology treatments, which command higher revenue/IA but lower margins.

• To recap, in its May result briefing, IHH announced an initiative to enhance EBITDA margin from 15% in 1QFY23 to >20% within 12-18 months by disposing non-performing assets.

• All in, we assume EBITDA margin for Malaysia, Acibadem and India to improve in 2HFY23 as guided by management.

• On concerns of higher 2QFY23 finance costs (+2.1x YoY) despite total financing remaining at RM9.3bil-9.4bil, IHH guided that this was a result of recent interest rate revisions in tandem with global trends. We have factored in this new normal in our latest earnings revision for FY23F-25F.

• Notably, Mr Joe Sim has resigned from his position as group COO to return to the public service. Dr Prem Kumar Nair, who is CEO of IHH Singapore, will be appointed group CEO from 1 Oct. Prior to joining IHH in 2020 in his current role, Dr Nair held the roles of chief corporate officer and managing director of Singapore healthcare at Raffles Medical Group from 2015 to 2017.

• To recap, the group continued to emphasise its post-pandemic 3-year growth strategies by expanding bed capacity by 25% across Malaysia (600 additional beds), India (1,400 additional beds), Turkey (380 additional beds) and Europe (200 additional beds) while exploring strategic opportunities across Asia and Europe (Exhibit 1).

• IHH guided that dividend will be paid semi-annually instead of annually in the past 5 FYs. For now, we maintain FY23F-25F DPS assumptions.

• The stock currently trades at a fair FY23F P/BV of 1.7x – 13% discount to its 5-year average of 2.0x amid slowing global economic growth prospects.

Source: AmInvest Research - 1 Sept 2023