IHH’s patient throughput will continue to improve, both from the domestic and international markets. This should raise its average bed occupancy rate (BOR) to 70%. Meanwhile, Acibadem’s EBITDA margin should sustain at mid-20s driven by a “cluster” strategy in procurement. We maintain our earnings forecasts, TP of RM7.00 and OUTPERFORM call.

Key highlights. We came away from IHH’s post 4QFY22 results briefing feeling positive. The key highlights are as follows:

1. Malaysia: The group expects double-digit growth in 2023 (which we have factored into our forecast), driven by sustained pent-up demand for elective surgeries, from both local and foreign patients.
   Recall, its Malaysia operation reported strong revenue intensity in 4QFY22 underpinned by revenue per inpatient (+5% QoQ) with bed occupancy rate (BOR) rising to 68% vs. 70% in 3QFY22. The lower BOR was due to additional beds added in Pantai Penang. Foreign patients in Malaysia accounted for 6-7% (pre-COVID level) of revenue.
    
2. Singapore: The group is confident of overcoming the nursing staff shortages with >100 nurses currently in the recruitment pipeline and expect that an additional uptick in volume by 10% once the additional beds capacity improves.
   
   4QFY22 BOR was 56% vs. 57% in 3QFY22 due to lower inpatient throughput (-3% QoQ) no thanks to nursing shortages which we believe was only temporary, though leading to constraint in raising beds capacity. However, revenue intensity in Singapore remained robust driven by higher inpatient per revenue (+11% QoQ). Presently, foreign patients in Singapore accounts for 25% of country revenue which is seeing the return of medical travel.
   
   Meanwhile, Mount Elizabeth hospital in Singapore is undergoing a major refurbishment to convert its two-bed rooms to single rooms to meet strong local and international demand. The renovation will be phased over three years to minimise disruptions.
    
3. Turkiye: Looking ahead, driven by procurement synergies and cost efficiency under the cluster strategy, the group conservatively expect a sustainable EBITDA margin of 23%-25% in Acibadem which is in line with our assumption of 23% for FY23. The group is seeing pent-up demand for elective surgeries including local and foreign patients returning, and to gain further momentum in 2023.
   
   Foreign patient revenue contribution remained strong at 15% in 4QFY22 (15% in 3QFY22). European operation’s contribution for Acibadem increased to 31% from 28%. As a result, FY22 non-lira contribution rose to 46% from 41% in FY21. In Turkiye, 300-bed Acibadem Atasehir Hospital which opened in mid-Sept 2022 experienced a faster-than-expected ramp-up due to strong medical tourism. As a result, Acibadem Atasehir’s EBITDA margin rose from single-digit to high teens from Oct to Dec 2022. All in, Acibadem’s EBITDA margins rose 6ppts from 21% to 27% in 4QFY22 driven by: (i) BOR rising to 75% vs. 68% in 3QFY22, (ii) inpatient admissions (+20%), (iii) revenue per inpatient (+2%), (iv) absence of pre-operating cost in 9MFY22 due to opening of Acibadem Atasehir, and (v) push-through of price adjustment in line with inflation.
    
4. Hong Kong and Greater China: Gleneagles HK continued its growth momentum in 4QFY22 with BOR of 68% vs. 64% in 3QFY22 to register positive EBITDA since May 2021. The group has completed the divestment of its effective 49% stake in Gleneagles Chengdu Hospital Company Limited. We are positive on this corporate move by IHH which is tandem with the group’s strategy to de-risk its operations and investments in China to minimise losses. We believe divestment of Gleneagles Chengdu is expected to narrow losses and boost the group’s overall bottomline. Specifically, FY22 losses in Greater China widened to RM900m compared to RM597m in FY21.
    
5. Across all its key markets IHH operates in, prices were adjusted for inflation. The group has raised prices in tandem with rising inflation rate in an effort to mitigate rising cost pressure. The group expect the healthcare industry to continue facing near-term macroeconomic headwinds as most costs are expected to increase with global rising inflation including labour and higher energy prices. Nursing shortages across most markets have also led to increased pressure on salary costs, as well as placing limitations on bed capacity. Despite the high inflationary pressure, the group is unperturbed by any potential slowdown in demand. This is because IHH caters to a particular segment which is less price sensitive i.e. low “price elasticity of demand”. IHH has been able to pass on cost inflation to customers, as reflected in its rising revenue per inpatient over the past several quarters.
    
6. As the Group pivots its strategy towards growth, it continues to seek opportunities to acquire strategic assets. It will also focus on improving its return on equity (ROE). The Group will continue to improve group synergies and operational efficiencies. In February 2023, the Group expanded its footprint into Turkiye’s third largest city of Izmir with the acquisition of 100% of Kent Health Group which operates the largest private hospital as well as two other medical centers in Izmir.

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 Turkiye. We believe the key growth factor 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 maintain our forecasts and SoP-TP of RM7.00 (see Page 3). There is no adjustment to TP based on ESG given a 3-star rating as appraised by us (also see Page 3).

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, Turkiye 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 - 2 Mar 2023