Our recent meeting with IHH has further reaffirmed our positive view on the Group’s prospects as IHH remains committed to continue improving its ROE via (i) group procurement strategy, (ii) creating new streams of income with more lucrative margins, and (iii) driving efficient growth through its cluster strategy. Separately, on the back of higher non-Lira revenue contribution and hedged borrowings, we reckon that Acibadem is on a much stronger footing now to weather through any volatility in the TRY. We reiterate our BUY call on IHH, with an unchanged SOP-derived TP of RM7.51.

Bottomline focused. IHH’s refreshed strategy to double its ROE from 2020 to 2024 has started to bear fruit, where its ROE improved from 3.8% in 2019, to an average of 6.6% YTD FY21. The Group remains committed to continue driving bottomline growth to boost its ROE by (i) extracting synergies from its international network via a group procurement strategy, (ii) proactively developing new revenue streams that command better margins, and (iii) driving efficient growth by expanding into new or existing clusters that are earning accretive.

Likely unperturbed by the Lira depreciation. In view of the Turkish Lira (TRY) depreciation, we believe that Acibadem is on a much stronger footing currently to withstand any volatility in the TRY, considering that it has hedged 95% of its non-TRY borrowings via constant currency swaps, while the remaining 5% is mitigated by foreign currency deposits amounting to c.EUR25-30m. Acibadem also has a partial neutral hedge, as 40% of its revenue generated are denominated in foreign currencies (i.e: USD and EUR), due to revenue receipts from foreign patients as well as Acibadem’s operations in Europe. This has improved considerably as compared to 2017, where its non-TRY receipts only stood at 28% of total revenue. Not to mention that bulk of Acibadem’s cost of sales are also now denominated in TRY, thereby reducing the disparity between the revenue generated and its gross profits.

Greater China. Having opened in 2017, Gleneagles Hong Kong (GHK) has achieved EBITDA-breakeven in May 2021. However we reckon that breakeven at net profit level will take slightly longer to achieve, potentially in FY23, given the sheer size of the hospital. Note that GHK is a 500-bedded hospital, relatively larger than Pantai KL and Mount Elizabeth Orchard’s bed count of 335 beds and 345 beds respectively. Going forward we expect GHK to continue ramping up its operations and opening more beds (current operational beds: c. 200 beds), and the stronger EBITDA generated should help cushion any start-up losses arising from the opening of Gleneagles Shanghai (450 beds), which is expected to be in 2H22.

Diversifying revenue via lab services. IHH’s lab testing businesses have firmly established itself as the market leader (by revenue) in its respective operating market (see Figure #1) and have always been a good revenue contributor to the Group (9MFY21: RM1.56bn). However, in Malaysia, Singapore and Acibadem, IHH’s lab testing business has been a captive service whereby it mainly serves IHH’s own chain of hospitals. We understand that IHH intends to grow its lab business by expanding its service offerings to include tests like genomics testing and molecular diagnostics, which generally commands better margin than the conventional testing like blood tests, ultimately boosting the overall ROE for the Group.

Embarking on a digital journey. In order to collect data in a more systematic way, IHH has rolled out a Hospital Information System (HIS) in several hospitals in Malaysia and is targeting to introduce the said system to its hospitals in Singapore. The Group has also set aside c.RM100m for its digital transformation plan, which is expected to take approximately four years to complete and is planning to develop an application to make patient experience more seamless. While the HIS and application is unlikely to contribute directly to the Group’s profits at this juncture, however, we reckon that the data collected can be used for research purposes, indirectly improving the overall clinical outcome with the use of data analytics.

Forecasts. Remain Unchanged.

Maintain BUY, TP: RM7.51. We keep our SOP-derived TP of RM7.51 unchanged and we reiterate our BUY rating on IHH, as its longer term growth trajectory remains strong, hinging on its efforts to continue improving ROE via the measures mentioned above.

Source: Hong Leong Investment Bank Research - 8 Feb 2022