IHH’s 90%-owned Acibadem is acquiring Kent Health Group for an estimated EUR55m (RM255m) cash to further expand its footprint in Turkey. We expect profits from the hospital to at least cover the financing cost over the short term and the acquisition to be earnings accretive over the medium to long term. Pending the completion of the deal, we maintain our forecasts, TP of RM7.20 and OUTPERFORM call.

Expanding footprint in Turkey. IHH’s 90%-owned Acibadem is acquiring 100% stake in Kent Health Group for EUR55m (RM255m) to further expand its footprint in Turkey. This latest development by IHH is a step in the right direction in its quest to become a dominant private healthcare player in Turkey leveraging on Acibadem’s strong brand name, clinical expertise and track record which is in line with the group’s growth cluster strategy. Kent Health Group operates the largest private hospital in Izmir, namely the 340-bed Izmir Kent Hospital with an attached cancer centre, as well as two medical centres in the city. Izmir is Turkey’s third largest city with a population of 4.4m. Izmir Kent Hospital will be 19th hospital in Turkey and 25th in the Acibadem’s group. The target market for this hospital is the middle-higher income group in Turkey.

We gathered that the hospital is presently operating at mid-teens EBITDA margin. Driven by procurement synergies and cost efficiency under the cluster strategy, the group expect EBITDA margin from this hospital to range above 20% (compared to our FY23F Acibadem’s EBITDA margin assumption of 25%) and turn profitable in the medium term.

For illustration purposes, assuming a bed occupancy rate of 60%, average revenue per inpatient of RM9,000 and net margin of 10%, we expect profits from the hospital to cover the financing cost of RM12.75m (assuming 5% on RM255m capital outlay) over the short term and the acquisition to be earnings accretive over the medium to long term.

The acquisition will increase IHH’s net debt and net gearing of RM5.8b and 0.22x as at 30 Sept 2022 to RM6.1b and 0.23x which are still manageable. The transaction is expected to be completed in 1QCY23.

Outlook. Looking ahead in 2023, we expect IHH’s revenue per inpatient growth of 10%-15% (vs. an estimated 10%-20% in 2022), inpatient throughput growth of 10%-15% (vs. an estimated 12%-25% in 2022) and bed occupancy rate (BOR) of 60%-73% (vs. an estimated 56%-70%% in 2022) for its hospitals in Malaysia, Singapore, India and Turkey. We believe the key growth for its inpatient throughput and BOR will be the return of elective surgeries and medical travel, the addition of new beds (constrained previously by staff shortages) and the first full year contribution from the Acibadem Ataşehir hospital.

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 - 3 Feb 2023