Investment Highlights

• We maintain BUY call on IHH Healthcare (IHH) with unchanged sum-of-parts (SOP)-based fair value (FV) RM7.80/share , which implies FY25F P/E of 30x, a 25% discount to its 5-year average of 40x. In addition, the incorporates a 3% premium with our unchanged ESG rating 4 stars .

• We are positive on the longer-term prospects of IHH proposed acquisition of Island Hospital (IH), located at Ja Macalister, George Town, Penang , for RM3.9bil ca which is expected to be completed by end of this year.

• The transaction includes an adjacent vacant land measuring acres, valued at RM223mil or bargain RM173 psf vs. o RM300-RM500 psf for commercial land near the area. This la could significantly expand IH’s bed capacity by 400 to 1k.

• Ex-vacant land, the acquisitive FY24F EV/EBITDA of 19 appears fair vs. 21.9x for IHH’s acquisition of Tier-1 hosp Prince Court Medical Centre in Sep 2020 and 20.7x for Rams Sime Healthcare in Sep 2022.

• Management expects IH to register a strong EBITDA growth 45% in FY24F and at least 20% in FY25F, propelled by doubling of capacity from 296 beds in 3Q2022 amid ris revenue/inpatient admission (Rev/IP) intensity.

• Assuming a FY25F earnings growth of 20%, synergies RM25mil, one-off acquisition costs of 27mil and interest cha of 4% on debt raised, we estimate that the IH acquisition co have a neutral impact to FY25F earnings and a slight increment to FY26F.

• We also estimate that the proposed IH acquisition will raise group’s FY25F net debt/EBITDA from 1.0x currently to 1. which remains comfortable given the group’s visible earnin profile.

• IH will be the group’s third Penang hospital together with Pan Hospital and Gleneagles Hospital, which is only 2km away fr IH. This is a prestigious hospital which focuses on medi tourism with the largest pool of specialists who are hig ranked in their fields, including orthopeadics, oncolo cardiology, gastrointestinal and general surgery.

• In 1H2024, 60% of IH’s revenue stemmed from foreign patien of which 90% were from Indonesia (equally shared with No Sumatrans, Javans and the rest of Indonesia).

• With IH’s 500 operational beds (which can be scaled up to 6 beds with minimal capex), this will raise the group’s Malays bed capacity by 17% to 3.5k. The group estimates 1H’s FY2 average Rev/IP to reach RM12k, which is commendably hig by 12% vs. the 2QFY24 average of RM10.7k for the grou Malaysian hospitals.

• IH will be one of the largest hotels in IHH’s domestic network which offers substantive cross-selling opportunities given the lack of expansion prospects for the existing 2 Penang hospitals. From IH, management expects to generate synergies of over RM200mil over the next 5 years with RM25mil for the first year of acquisition.

• Going into 2HFY24 onwards, we expect the group’s robust revenue trajectory to be sustainable, supported by rising rev/IP intensity and the expansion of the group’s bed capacity from 12k currently by 4k over the next 5 years, particularly in Malaysia (+1,300), India (+1,860), Acibadem (+1,040) and Hong Kong (+170), as well as continuing EBITDA margin improvements for operations in India and China.

• We deem that the stock currently trades at an attractive FY25F PE of 25x vs. its 5-year average of 40x while a healthy FY24F net debt/EBITDA of 1x offers leverage for cluster-based acquisitions to fuel growth prospects.

Source: AmInvest Research - 5 Sep 2024