IHH’s management has cautioned that 2Q22 might see some margin pressures, arising from higher operational costs (like staff and energy expenses), as well as tapering of Covid-19 related services. Having said that, we believe that some of the margin pressure will be alleviated by the recent price adjustments made. Post reopening of international borders, medical tourism will also be one of IHH’s key focus area to help drive sustainable growth within the Group. We keep our BUY call on IHH, with an unchanged SOP-derived TP of RM7.75, as we still like IHH for its refreshed strategy to drive long-term sustainable growth, despite the short-term headwinds faced.

2Q might be challenging. Margin pressures are expected to be more pronounced in 2Q as Covid-related revenue tapers off while higher costs start to kick in. Cost pressures will mainly stem from higher staff cost, as more manpower are required to cope with the expected increase in patient volume. Energy inflation is also expected to hit IHH, and management estimates the impact to be in the range of RM80-120m for FY22. That said, we do note that some of these costs have been passed on and compensated by price revisions. Quantum of the price increase made thus far is in line with the rate of inflation and that should help alleviate some pressure off its margins.

Medical tourism. With international borders reopening post-pandemic, IHH aims to make medical tourism a key growth driver going forward. Note that medical tourism has already accounted for 6-8% of Singapore’s 1Q22 revenue (vs. 25% pre pandemic), despite bulk of the foreign patients only arrived for treatment in March, signifying a strong rebound in foreign patient volume. As for Malaysia operations, reopening is still in the early stages currently, but we expect to see a similar trend to that of Singapore’s, given Malaysia’s positioning as one of the top medical tourism destination. Traditionally medical tourist arrivals for Malaysia operations have mostly centred in Gleneagles Penang, but management indicated that recently it has also seen increasing foreign patient arrivals in its flagship hospitals in Klang Valley (like Prince Court Medical Centre, Pantai KL and Gleneagles KL). Foreign patient volume remains strong in its Turkish operations, making up 25% of its revenue. The hyperinflation situation in Turkey is also not expected to hamper its foreign patient volume as revenue receipts are denominated in USD and EUR, and it also has a separate pricing scheme for foreign patients.

Growing its lab business. IHH’s lab testing business has firmly established itself as the industry leader in its respective operating markets and has always been a good revenue contributor to the Group (1Q22: RM463.7m). The tapering of Covid-related tests in 1Q22 did not cause a huge decline in top-line contribution, but we note that EBITDA margins for its lab segment has narrowed by 8 ppts QoQ, due to (i) change in test mix, and also (ii) decline in prices of Covid-related tests. IHH’s focus for this segment is to drive more non-Covid related tests, growing it test menu and offer more high-end tests, as well as establishing new labs. IHH also aims to be the referral for both private and public hospitals across all its geographies.

Forecast. Unchanged.

Maintain BUY, TP: RM7.75. We reiterate our BUY rating on IHH, with an unchanged SOP-derived TP of RM7.75, despite the looming short-term headwinds arising from cost pressures. We continue to like IHH for its refreshed strategy in place that will underpin its sustainable growth over the longer term.

Source: Hong Leong Investment Bank Research - 30 May 2022