Investment Highlights

• We maintain HOLD on IHH Healthcare (IHH) with a lower DC derived fair value (FV) of RM6.17/share (from RM6.34/sha previously) (WACC of 8.8%; terminal growth rate of 2%) reflect lower earnings estimates, which implies FY24F PE 40x, near its 5-year average of 42x. Our FV incorporates a 3 premium with our unchanged ESG rating of 4 stars.

• IHH’s FY23 core net profit of RM1.3bil generally came in belo expectations, 6% short of ours and 23% of street’s. Th deviation was mainly due to Acibadem’s core EBITD (adjusted for RM256mil deferred tax credits) deteriorating in negative territory and Malaysian operation’s lower-tha expected EBITDA margins in 4QFY23.

• Hence, we reduced FY24F-25F earnings by 8%/7% to accou primarily for lower EBITDA margin assumptions for bo Acibadem and Malaysian hospitals. In addition, we introduce FY26F earnings with a 17% YoY growth, underpinned by th expansion of the group’s bed capacity in key regions (Exhib 2) – Malaysia, India and Turkiye, as well as normalisation Acibadem’s EBITDA margin.

• The group declared a final dividend of 5.5 sen/share in 4QFY2 bringing FY23 total dividend to 18.6 sen/share (implying payout of 128%), which was 7% above our forecast of 17 sen/share. The positive deviation was mainly due to our low payout ratio assumption of 112%. Notably, we have taken in account the special dividend of 9.6 sen/share declared in Ma 2023.

• Going into FY24F onwards, IHH has increased dividend polic from at least 20% of core PATAMI to 30%. However, this w not affect our original payout assumption of 45%.

• On a YoY basis, IHH registered a 4QFY23 revenue growth 9% to RM5.3bil, mainly driven by continued strong recovery both local and foreign patients seeking non-Covid treatment particularly at IHH’s hospitals in Singapore, Malaysia an Acibadem, commencement of operations at Atasehir Hospit in Sep 2022, continuous ramp-up of operations at GH Hospital, as well as acquisitions of Ortopedia in Aug 2022 an Kent in Feb 2023.

• In addition, the stronger revenue was also boosted by bett product mix with more acute patients and price adjustments counter inflation, particularly for Acibadem’s operation Hence, revenue per inpatient admission (revenue/IA) improve across the board by 4%-36%.

• However, IHH’s 4QFY23 core net profit declined by 22% YoY to RM265mil, predominantly attributed to Acibadem’s core EBITDA deteriorating into a negative figure, possibly from price increases failing to align with cost inflation such as staff and medication expenses. Furthermore, the weaker core profit was impacted by the Malaysian operation’s decreased EBITDA margin (-5%-point), possibly attributed to less favourable product mix.

• On a QoQ basis, IHH's 4QFY23 revenue deteriorated by 9%, primarily due to lower patient volumes in Singapore, Malaysia and India (-3%-8% QoQ) due to holiday and festive season with the exception of Acibadem experiencing a 13% QoQ increase, possibly attributed to increased post-election political stability and recovery of patients post-earthquake in 2QFY23. Nevertheless, revenue/IA improved in the range of 2%-4% in Singapore, Malaysia, and India except Acibadem, which experienced a mild 1% decline. In tandem with lower revenue, 4QFY23 core net profit decreased by 28%.

• Going into FY24F, we expect revenue to be stronger YoY, supported by the expansion of the group’s bed capacity in Malaysia, India and Turkiye, as well as EBITDA margin improvements for operations in Malaysia and Acibadem.

• We deem that the stock is trading at a fair FY24F PE of 40x vs. its 5-year average of 42x, with a mild dividend yield of 1%.

Source: AmInvest Research - 1 Mar 2024