Investment Highlights

• We upgrade IHH Healthcare (IHH) to BUY from HOLD previously with a higher sum-of-parts (SOP)-based fair value (FV) of RM7.35/share (from an earlier RM6.64/share), which implies FY25F P/E of 37x, at a 7% discount to its 5-year average of 40x. In addition, the FV incorporates a 3% premium with our unchanged ESG rating of 4 stars.

• IHH’s 1QFY24 core net profit of RM403bil (excluding exceptional gains of RM365mil largely from deferred tax credits and net monetary gains from the adoption of MFRS 129 on Turkiye’s hyperinflation) came in above our expectation but within consensus, accounting for 30% of our earlier FY24F net profit and 24% of street’s. This stems largely from rising revenue per patient across all markets.

• Hence, we raised FY24F-26F earnings by 10%-20% to account primarily for higher revenue and margin assumptions for hospitals in Singapore, Malaysia, Turkiye and Hong Kong.

• While the group did not declare an interim dividend, we maintain our payout assumption of 45%. Recall IHH has increased dividend policy from at least 20% of core PATAMI to 30% for FY24F onwards vs. 62% in FY23 (excluding special dividend of 9.6 sen from IMU Healthcare disposal gains).

• On a YoY basis, IHH’s 1QFY24 revenue rose by 16% to achieve a record RM6bil, mainly driven by continued strong contributions from Acibadem (+20%), Singapore (+18%), India (+20%) and Greater China (+24%). While inpatient admissions slid 3% YoY to 219k, revenue/inpatient rose YoY by 15% in Singapore, 51% in Turkiye/Europe, 11% in India and 10% in Malaysia. This largely drove 1QFY24 core net profit growth of 22% YoY.

• Sequentially, the group’s 1QFY24 revenue increased by 12.5% as inpatient admissions rose 9.3% but core net profit accelerated by a faster 52% due to a 2.9%-point improvement in EBITDA margin to 23%, underpinned by stronger contributions from Acibadem (+77%), India (+29%), Singapore (+14%) and Malaysia (+13%).

• Going into 2QFY24 onwards, we expect the strong 1QFY24 revenue trajectory to be sustainable, supported by the expansion of the group’s bed capacity by 33% or 4k over the next 5 years, particularly in Malaysia (+1,300), India (+1,860), Acibadem (+1,040) and Hong Kong (+170), as well as EBITDA margin improvements for operations in India and China.

• We deem that the stock is trading at an attractive FY25F PE of 32x vs. its 5-year average of 40x while a healthy FY24F net debt/EBITDA of only 1.2x and gross cash of RM2.2bil offers leverage for cluster-based acquisitions to fuel growth prospects.

Source: AmInvest Research - 30 May 2024