- We maintain our HOLD on IHH Healthcare Bhd, with an unchanged fair value of RM3.80/share, based on a sum-of-parts valuation.

- Our meeting with management reaffirms our belief that operations at new hospitals, besides its expansion plan, are coming along nicely. IHH’s medium- to long-term catalysts are solid, underpinned by growing bed capacity expansion in Malaysia (+38% beds) and Turkey (+29% beds) that will drive growth for the next few years.

- Turkey remains as the group’s biggest growth potential given the fairly fragmented healthcare industry. Following the recent breakeven at the EBITDA level for Mount Elizabeth Novena and Acibadem Ankara, IHH is looking forward to achieving the same for Acibadem Bodrum by this year.

- Mount Elizabeth Novena is paving the way for better operational efficiency, underpinned by the present bed utilisation of >50% – operating 120 beds out of the 180 licensed-beds. A gradual rampup of bed capacity (remaining 150 beds) is expected in FY14F upon hitting 70%-75% utilisation and this should further catalyse the stock.

- A key concern for Singapore is the sensitivity towards the Rupiah. Should the Singapore dollar appreciate further against the Rupiah, a potential softening in revenue from Indonesian patients (who constitute 50% of foreign medical patients) could happen, given the availability of cheaper alternatives elsewhere. This could be partly mitigated by the growing domestic pool.

- Interestingly, the upcoming hospital management and consultancy agreement with the Shanghai International Medical Zone (which is expected to open in 2014) will be a test case for IHH. The hospital will be run on a similar basis as the private healthcare in IHH’s key markets – housing specialist doctors (as

opposed to the typical healthcare system in China of just general practitioners).

- Another catalyst would be the greenfield hospital in Hong Kong (expected to be operational in 2017), given a c.25% higher healthcare cost than Singapore. More importantly, IHH could leverage on Hong Kong to penetrate the China market.

- Relative to peers, IHH’s valuations on an EV/EBITDA basis is higher than the average of 20x for FY13F and 13x for FY14F, based on Bloomberg consensus. Similarly, on a PER basis, we find that IHH’s 48x PE for FY14F is above average (>100% premium).

- We like the stock’s defensive qualities and medium- to long- term earnings growth prospects. However, we believe a lot of the positives are already reflected in the share price. Given the limited upside to our fair value and steep valuations, we reiterate our HOLD on the stock.

Source: AmeSecurities