- We reaffirm our HOLD recommendation on IHH Healthcare with a lower SOP-based fair value of RM3.60/share (vs. RM3.90/share previously). Our revised fair value follows the adjustment to our EBITDA to reflect:- (1) slower ramp up at Mount Novena Elizabeth; (2) foreign exchange rate assumption; and (3) full consolidation of Parkway Life REIT (36%-owned) as a subsidiary.

- While we like IHH’s strong branding and good prospect, its valuation of 37x PE for FY14F is lofty when compared to regional peers’ 30x, in our view. Going forward, expansion will mainly be in Malaysia and Turkey. As for Singapore, there is no further expansion besides the ramp-up of bed capacities.

- Over the next few years, hospital bed capacity is expected to increase by 2,105 beds (or 71%) to 7,140 beds from 5,035 beds at end-FY13F, while beds under JV and hospital management agreement will increase by 1,526 (+33%) to 2,271 beds from 745 beds as at end-FY13F.

- IHH’s projected 3-year earnings CAGR (FY14F/FY16F) of 19% will be driven by higher inpatient volume resulting from expansion plans, ramp-up of operational efficiency and medical tourism. FY13F full-year results are due for release on 27 Feb. We foresee a stronger 4Q following a seasonally soft 3Q.

- Further de-rating of the stock could stem from political instability in Turkey and a volatile Turkish Lira. Turkey’s operation contributes to 38% of revenue and 28% of EBITDA. Turkey still has the highest growth potential for IHH given its strategic location in the CEEMENA region backed by strong branding.

- Business is as usual amid the political turmoil In Turkey. Interestingly, we understand that medical tourism in Turkey (c.7% of Acibadem’s revenue) continues to grow.

- We are more concerned about foreign exchange translation differences impacting earnings. The stronger translated revenue (from SGD terms) should partly offset the lower translated Lira revenue. Net impact should be positive given the larger contribution from Singapore (43% of EBITDA). It will also be cushioned by Acibadem’s USD-denominated medical tourism receipt.

- Furthermore, the repayment of USD350mil debt at Acibadem will reduce foreign currency fluctuation. There is no impact from the interest rate hike in Turkey due to IHH’s minimal Lirade nominated debt.

- Backed by its expansion plans, we believe that IHH is well positioned to capitalise on:- (i) the growing private healthcare sector in key markets; (ii) ageing population; and (iii) medical tourism.

Source: AmeSecurities