IHH’s FY22 results missed expectations due to weaker-than expected showing from its Singapore and Turkey operations. However, we are not overly perturbed as patients are flocking back especially for elective surgeries. We cut our FY23F net profit by 15%, TP by 3% to RM7.00 (from RM7.20) but reiterate our OUTPERFORM call.

FY22 core net profit of RM1,381m (-13% YoY) missed our forecast and consensus estimate 10% and 8%, respectively. The variance against our forecast came largely from weaker-than-expected performance from Singapore and Turkey.

YoY, FY22 revenue increased 5% 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 - higher in Malaysia (+35%), Acibadem (+7%) and India (+4%) but lower in Singapore (-4%). Revenue per inpatient - rose in Singapore (+26%), Acibadem (+31%) and India (+3%) but lower in Malaysia (-7%). However, EBITDA fell 5% due to decline in COVID-19- related services and higher staff costs driven by annual increments and bonus provision. FY22 core net profit came in lower by 13% due to lower contribution from Singapore and Acibadem, and a 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. A first and final dividend of 7.0 sen was declared which came within our expectation.

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.

Forecasts. We cut our FY23F net profit by 15% as we reduce our EBITDA margin assumptions for Singapore and Acibadem operations to 21% and 23% (from 22% and 24%), respectively, and introduce our FY24F numbers.

Coupled with rolling forward our valuation base year to FY24F from FY23F, we arrive at an SoP-TP that is 3% lower at RM7.00 (from RM7.20). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

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. Reiterate OUTPERFORM.

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 Mar 2023