IHH’s 1HFY22 results met expectations. 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 addition, that has been a strong pent-up demand for elective surgeries as economies reopen. We maintain our forecasts, SoP-based TP of RM7.20 and OUTPERFORM call.

1HFY22 core net profit of RM725m (-9% YoY) came in within expectations at 45% of our full-year forecast and the full-year consensus estimates both.

YoY, 1HFY22 revenue increased 4% due to the recovery of core non COVID-19 patients from both local and foreign patients and continuous ramp-up of operations at Gleneagles Hong Kong which more than offset lower COVID-related services. Overall, inpatient admission was mixed across the board with Malaysia (+25%), Acibadem (+11%) and India higher but declined in Singapore (-3%). Revenue per inpatient rose in Singapore (+22%) and Acibadem (+18%) but lower in Malaysia (-5%) and India (-3%). However, EBITDA fell 5% due to decline in COVID-19- related services and higher staff costs driven by annual increments and bonus provision. 1HFY22 CNP came in lower by 9% due to lower contribution from Singapore and Acibadem, and hit from MFRS 129 attributable to higher depreciation and amortisation. Note that as a result of MFRS 129, the group’s property, plant and equipment carrying amount in Turkey were higher after reindexation. Recall, Turkey is classified as a hyperinflationary economy under MFRS 129. No dividend was declared as expected.

Outlook. Going forward, the group is optimistic of the rebound in its non COVID business; however, it expects some short-term headwinds such as the tapering of COVID-19-related revenues and inflationary pressure. 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.There have been strong returns of domestic patients as well as growth in foreign patients in Malaysia and Singapore. In Turkey (80% bed occupancy rate) and Europe, IHH foresees the high bed occupancy rates to continue. 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 from end-Mar 2022, and (iii) its commanding market position in countries it operates in.

Forecasts. Unchanged.

We keep our SoP-TP unchanged at RM7.20. There is no adjustment to TP based on ESG for which it is given a 3-star rating as appraised by us. 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 risks to our call include: (i) regulatory risk, (ii) risks associated with overseas operations, and (iii) the lack of political will to roll out a national health insurance scheme.

Source: Kenanga Research - 26 Aug 2022