IHH sees more potential for growth, supported by new bed openings, ramping up of existing hospitals’ operations and via inorganic means by acquiring earnings accretive hospitals. Structural change in patient behaviour of seeking treatment (even for less acute illnesses) will also bode well for IHH by way of improved patient volumes. Margins should see improvements as cost pressure are expected to ease in FY23. We make no changes to our forecasts. Reiterate BUY on IHH with unchanged SOP-derived TP of RM7.79.

More room to grow. After witnessing a solid recovery in patient volumes postpandemic, management believes there will be more potential for growth supported by both organic and inorganic means. This include adding 1200 beds in India and 600 beds in Malaysia, as well as exploring other M&A opportunities that are earnings accretive, and the incremental contribution from its recently acquired Izmir Kent Hospital. Continuous ramp up of Acibadem Atasehir and Gleneagles Hong Kong will also aid in driving revenue growth. Not to mention the structural change in patient behaviour (seeking treatment even for less acute illness) will also help boost patient volumes. Management aims to achieve RM20bn revenue in FY23f, implying an 11% growth vs FY22.

Margins should see improvement. Management expects cost pressures to ease in FY23, mainly on lower electricity and labour costs. This will be underpinned by the easing of utilities prices as well as the hiring of more Patient Care Assistants (PCA) to relieve non-nursing responsibilities off its nurses, improving the overall productivity of nurses. Continuous ramp up of its newer hospitals will also help to improve margins. Additionally, any real cost increases are also expected to be passed on to patients to protect margins.

Reduced capacity in Singapore. Singapore’s bed occupancy rate (BOR) in 4Q22 stood at 56% (vs 3Q22: 56% and 4Q19: 65%). The relatively lower BOR (vs prepandemic) was a result of nurse shortage, as there was a lack of manpower to operate the beds, leading to bed closures. The situation has been gradually improving, as evident by the lower bed closure count of c.100 beds currently, which has greatly reduced by c.50%. Management anticipates a further improvement in the situation, aiming to reduce the bed closure count to 20-30 beds by the end of 2023.

Renovation disruptions. Separately, the ongoing renovation works in Mount Elizabeth (345 beds) will also have an impact of c.20% on the hospital’s bed capacity. However, the impact will be managed and mitigated by (i) allocating patients to its sister hospitals including Mount Elizabeth Novena and Gleneagles Hospital in the event of patient overflow, as well as (ii) attempting to evenly distribute the patient admissions throughout the week (typically occupancy is higher during mid-week).

De-risking China. The sale of its stake in Gleneagles Chengdu to Perennial Healthcare has been completed on 27th February and IHH has also impaired a large portion of its Chinese assets in 4Q22 (RM545m impairment for Parkway Shanghai, several other clinics across China and an uncompleted hospital in Myanmar). Management will continue to de-risk and plans to exit the China market are still intact, which we believe is in line with the Group’s cluster strategy.

Forecasts. Remain Unchanged.

Maintain BUY, TP: RM7.79. Reiterate BUY with unchanged SOP-derived TP of RM7.79. Our TP implies an EV/EBITDA of 17x (close to 0.5SD below its 5-year average). We like IHH for its potential to growth further via both organic and inorganic means, as well as its strong market position in all key markets that it operates in.

Source: Hong Leong Investment Bank Research - 2 Mar 2023