• IHH announced the termination of discussions in relation to its proposed RM5.67bn acquisition of Ramsay-Sime Darby Health Care (RSD).
• We think management is exercising prudence on IHH’s capital allocation given the premium price tag of RSD to IHH’s current valuations.
• Reiterate Add with unchanged TP of RM8.07, but we expect IHH’s share price to remain depressed while investors await new growth catalysts. 

Plans to acquire Ramsay-Sime Darby falls through

● RSD’s portfolio of seven hospitals (four in Malaysia, three in Indonesia) would have added more than 1,500 hospital beds to IHH’s end-FY21 bed count of 11,418 beds across key operating markets (i.e. Malaysia, Singapore, India, Turkey and Europe) and gained it entry into a new market – Indonesia.
● IHH’s initial offer price of RM5.67bn in enterprise value represented an EV/EBITDA of c.25x based on RSD’s reported EBITDA of RM226m for FY6/21, which is more than an 80% premium to IHH’s current valuation of c.14x forward EV/EBITDA.
● We think IHH is exercising prudence in its capital use, especially given the rising interest rate environment which may make the earning s accretion from the acquisition less attractive.
● We do not foresee any downside risk to IHH’s earnings with the deal falling through as we have not included contribution from the potential deal in our earnings forecasts.

Plenty opportunities to grow

● IHH remains on the lookout for potential growth, especially with its disposal of International Medical University (IMU) announced in 2Q22 that IHH expects to be completed by 1Q23F. The sale will free up RM1.35bn in capital for IHH.
● Even without the RSD deal, IHH will be boosting its bed capacity with its acquisition of Ortopedia Hospital in Adana, Turkey, and the opening of a new floor at Fortis Hospital, Mulund in India.
● We think that such bolt-on acquisitions and organic expansion plans through the opening of new hospital wings to increase bed capacity could yield better results compared to larger acquisitions or greenfield projects that would have higher integration costs and long gestation periods, respectively. 
● Management has previously guided for RM2bn-2.5bn capex for FY23. 

Chengdu lockdown has little impact on IHH’s gestating hospital

● The recent Covid-19 lockdown in Chengdu may spark concerns over the impact on IHH’s Chengdu Gleneagles Hospital. However, given that this hospital’s operations had been impacted by the pandemic since its opening in late-2019, we see minimal impact to the group’s earnings.
● China’s zero-Covid policy continues to pose a challenge to IHH’s operations in mainland China, as private healthcare operators are unable to take in Covid -19 patients under current restrictions. This has prolonged the gestation period for Gleneagles Chengdu and could weigh on operations of Gleneagles Shanghai which is slated to open by end FY22.
● Meanwhile in Hong Kong, where private hospitals can accept Covid -19 patients for treatments, IHH’s Gleneagles Hong Kong has seen improving EBITDA contribution and management has guided for total operational beds to reach 300 by end-FY22. We believe IHH operates about 200-250 beds in Glenagles Hong Kong currently.

Maintain Add with unchanged TP of RM8.07

● We like that management continues to take a disciplined approach on IHH’s capital allocation even as it continues to be on the lookout for growth opportunities.
● Potential re-rating catalyst: stronger-than-expected contribution from new assets.
● Downside risks: disruptions to healthcare demand in Turkey given the country’s hyperinflationary economy, and margin pressure from rising staff costs.

Source: CGS-CIMB Research - 9 Sep 2022