We raise our FY22E/FY23E net profit forecasts by 8%/11% and increase our SoP-TP by 8% to RM7.20 (from RM6.65) (see table on page 2). Upgrade to Outperform from Market Perform on stronger- than-expected demand recovery, and earnings resilience in the face of sustained elevated inflation.

Key highlights. We came away from a recent engagement with IHH feeling positive. The key highlights are as follows:

1) Indications are pointing to a demand recovery in 2QFY22 that will be stronger than what we had previously assumed as the geographical locations in which IHH operates are exiting the end of the pandemic. There have been strong returns of domestic patients as well as growth in foreign patients in Malaysia and Singapore. Specifically, the group in April 2022 saw a strong return in local and foreign patients. In Turkey (80% bed occupancy rate) and Europe, IHH foresees high bed occupancy rate to continue. While in India, it expect gradual improvement of non-Covid patients starting from 2QFY22 since 1QFY22 saw depression on low elective surgeries due to the omicron wave. The group will continue to drive cost savings and ramp up productivity and increase bed occupancy ratio currently averaging at 60% in India. Gleneagles HK turned positive EBITDA since May 2021 and sustains its growth with EBITDA margin at single digit.

2) Given the low “price elasticity of demand” of private healthcare services, IHH has been able to pass on cost inflation to customers, as reflected in its rising revenue per inpatient over the past several quarters. In tandem with the stronger-than-expected demand we expect revenue per inpatient to surpass our earlier expectations. We highlight that prices have been adjusted for inflation in 1QFY22. However, the group stopped short of saying there could be further upwards price adjustment, depending on inflationary pressure. In Turkey, price adjustment is based on CPI. However, medical supplies inflation which represents bulk of its cost is less than price inflation and hence, it enjoys the difference which flow through to margins.

3) Turkey is expected to be classified as a hyper-inflationary economy. As such, Acibadem Holdings may have to apply IAS29 Financial Reporting in Hyperinflationary Economies in 2QCY22. The Group is in the midst of evaluating the implications on its financial reporting. Basically, assets need to be rebased which typically could potentially lead to higher level of depreciation.

Higher revenue growth assumptions. We now assume higher revenue per inpatient growth in Singapore/Malaysia/Acibadem of 18%/11%/20% from 8%/9%/10% for FY22E.

Investment case. IHH’s investment appeal lies in: (i) its pricing power, as the inelastic demand of healthcare needs provides it with the ability to pass cost through amidst rising inflation; (ii) strong pent-up demand from domestic and international patients of which the group have started seeing in end Mar 2022; and (iii) commanding market position in countries it operates in.

Key risk to our views is the global economy slipping into a prolonged recession/stagflation.

Source: Kenanga Research - 20 Jun 2022