IHH Healthcare Berhad (IHH)’s 1H23 core net profit was below our and consensus expectations, accounting for 36.1% and 43.6% of full year estimates, respectively. The deviation against our projection was mainly due to higher-than-expected finance cost. After excluding the exceptional items amounted to RM1,047.5mn (including net finance costs and MFRS 129-related adjustments) IHH recorded core earnings of RM644.9mn. We believe that IHH core operations in Malaysia and Singapore have ample room to fill up beds and ramp up occupancy in hospitals as local patients return for elective treatments. Despite the lower earnings forecast, we have slightly raised our TP to RM7.19 (from RM7.18) as we roll forward our valuation base year to FY24F (from FY23F). Our valuation is derived based on SOP valuation with a WACC of 7% for Parkway Pantai Limited, 11% for Acibadem.

• Below expectations. 1H23 core net profit of RM644.9mn (YoY: -11.0%) was below our and consensus expectations, accounting for 36.1% and 43.6% of full year estimates, respectively. The deviation against our projection was mainly due to higher-than-expected finance cost.

• Dividend. The group declared an interim cash dividend of 3.5 sen in 2Q23, bringing cumulative 1H23 DPS to 13.1 sen (vs. no dividend in 1HFY22). We estimate a total FY23 DPS of 15 sen, translating into a yield of 2.5%

• QoQ. IHH’s 2Q23 revenue was down by 9.1% QoQ dragged by lower revenue and higher cost of operation. In tandem, the group recorded lower core earnings of RM315mn (-4.5% QoQ) in 2Q23.

• YoY/ YTD. IHH registered higher top-line and bottom-line in 1H23, rose by +15% YoY and +53% YoY respectively. The better performance was supported by strong revenue growth from across key markets (Singapore: +12% YoY, Malaysia: +25% YoY, India: +15% YoY, Greater China: +40% YoY, Turkiye & Europe: +42% YoY). However, after excluding the exceptional items amounted to RM1,047.5mn (including net finance costs and MFRS 129-related adjustments) IHH recorded core earnings of RM644.9mn (-11.0% YoY).

• Outlook. We believe that IHH core operations in Malaysia and Singapore have ample room to fill up beds and ramp up occupancy in hospitals as local patients return for elective treatments. This will also be aided by the return of foreign patients and therefore, medical tourism. We anticipate IHH earnings to be driven by (i) higher volumes of local foreign patients, (ii) higher demand of elective surgeries, (iii) revitalization of medical tourism and (iv) strong position in healthcare space. However, inflationary pressure may cap IHH’s margin expansion.

• Forecast: We cut our FY23/24 earnings forecasts by 12.1%/7.5% to RM1,585mn/RM1,795mn respectively as we revised our finance cost and depreciation assumptions to be more reflective of current financial performance.

• Our call. Despite the lower earnings forecast, we have slightly raised our TP to RM7.19 (from RM7.18) as we roll forward our valuation base year to FY24F (from FY23F). Our valuation is derived based on SOP valuation with a WACC of 7% for Parkway Pantai Limited, 11% for Acibadem.

Source: BIMB Securities Research - 30 Aug 2023