IHH expects the strong recovery in patient throughput in recent quarters, from both domestic and international markets, to extend into 2023, underpinned by demand for non-COVID related services including elective surgeries We maintain our forecasts, TP of RM7.20 and OUTPERFORM call.

Key highlights. We came away from IHH’s post 3QFY22 results briefing feeling positive. The key highlights are as follows:

1. The group is seeing pent-up demand for elective surgeries including local and foreign patients returning. There has been strong return of patients as well as growth in foreign patients in Malaysia and Singapore since April 2022. In Malaysia, patients are flocking back with bed occupancy rate (BOR) rising to 70% vs. 61% in 2QFY22 while its Singapore’s 3QFY22 BOR was 57% vs. 56% in 2QFY22. In Singapore and Malaysia, foreign patients account for 17% (pre-COVID level) and 4% of revenue (not yet reach pre-COVID level). Overall, revenue intensity continued to remain strong. Inpatient admission was higher across the board including Malaysia (+36%), Acibadem (+7%) and India (+6%) but lower in Singapore (-3%). Revenue per inpatient rose in Singapore (+25%), Acibadem (+26%) and India (+1%), but lower in Malaysia (-9%). Inpatient admission rose in Malaysia (+25%) and Acibadem (+11%). In Turkey, foreign patient revenue contribution remained strong at 15%. European operation’s contribution for Acibadem increased to 31% from 28%. As a result, 9MFY22 non-lira contribution rose to 46% from 41% in FY21. While in India, BOR came in at 75% vs. 69% in 2QFY22 due to growth in domestic electives and recovery of medical travel. Gleneagles HK continued its growth momentum in 3QFY22 with BOR of 64% vs. 58% in 2QFY22 to register positive EBITDA since May 2021.

2. The group is unperturbed by the weaker 3QFY22 contribution from both Singapore and Turkey which is only temporary. In Singapore, 3QFY22 inpatient throughput was lower due to nursing shortages leading to constraint in raising beds capacity. Going forward, the group is confident of overcoming the nursing shortages with >100 nurses currently in the recruitment pipeline and estimate that an additional uptick in volume by 10% once the additional beds capacity gradually improves. In Turkey, the poor showing in 3QFY22 was largely due to seasonally longer summer holidays.

3. The group is looking to divest its effective 49% stake in Gleneagles Chengdu Hospital Company Limited but short stop of saying when a decision is expected to be forthcoming. We are positive on this corporate move by IHH which is tandem with the group’s strategy to review its operations and investments in China to minimise ongoing losses. We believe divestment of Gleneagles Chengdu is expected to further narrow losses and boost the group’s overall bottomline. Specifically, 9MFY22 losses in Greater China narrowed to RM248m compared to RM497m in 9MFY21. The group has signed an equity transfer agreement with Perennial Health to divest its effective 49% stake in Gleneagles Chengdu Hospital Company Limited.

We continue to like IHH for: (i) its pricing power, as the inelastic demand of healthcare provides it with the ability to pass cost through amidst rising inflation, (ii) the strong recovery in patient throughput, from both domestic and international markets as the pandemic comes to an end, and (iii) its commanding market position in the private healthcare space with presence in Malaysia, Singapore, Turkey and Greater China.

We maintain our forecasts and SoP-TP of RM7.20 (see Page 3). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (also see Page 3).

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 - 1 Dec 2022