IHH expects double-digit top line growth in Malaysia, while staff shortages at its operations in Singapore are easing. Its operations in Türkiye should pick up as memories of the recent earthquake fade. Its operations in India are seeing the return of medical tourists from the Middle East and Central Asia while its hospital in Hong Kong should turn profitable by end-2023. We maintain our forecasts, TP of RM7.00 and OUTPERFORM call.

Key highlights. We came away from IHH’s post 1QFY23 results briefing feeling positive. The key highlights are as follows:

1. Malaysia: The group expects double-digit growth in 2023 (which we have factored in our forecast), driven by sustained pent-up demand for elective surgeries, from both local and foreign patients. Beyond 2023, growth is expected to be driven by organic growth of an additional 600 beds (+20% to 3.600 beds) over the next 2-3 years.

Recall, its Malaysia operation reported strong revenue intensity in 1QFY23 underpinned by inpatient admissions (+41% YoY; +3% QoQ) with bed occupancy rate (BOR) rising to 72% vs. 68% in 4QFY22 and 52% in 1QFY22. Presently, 1QFY23 foreign patients in Malaysia accounts for 5% of country revenue.

2. Singapore: The staff shortage issue is easing gradually. Case in point, 1QFY23 saw an estimated 50% of additional beds reopened due to new staff hiring. The group is confident of overcoming the nursing staff shortages with >100 nurses currently in the recruitment pipeline. 1QFY23 BOR was at 60% vs. 55% in 1QFY22 thanks to easing nursing shortages. However, revenue intensity in Singapore remained robust driven by higher inpatient per revenue (+12% YoY). Presently, 1QFY23 foreign patients in Singapore accounts for 22% of country revenue which is seeing the return of medical travel.

3. Türkiye: The group is not perturbed by the lower contribution in Acibadem in 1QFY23 due to the Türkiye earthquake which is seen as temporary and expect patients to return in subsequent quarters as memories of the earthquake fade. 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 the remaining quarters of 2023.

Foreign patient revenue contribution remained steady at 12% albeit slightly lower at 15% in 4QFY22 due to the Türkiye earthquake. European operation’s contribution for Acibadem fell marginally to 27% from 31%. In Türkiye, 300-bed Acibadem Atasehir Hospital which opened in mid-Sept 2022 experienced a faster-than expected ramp-up due to strong medical tourism. All in, Acibadem’s normalised 1QFY23 EBITDA margin fell 5ppts from 27% to 22% (excluding a one-off RM25m donations for Türkiye earthquake) due to the less than optimum patients throughput arising from the the Türkiye earthquake.

4. India: The group reiterate that EBITDA mid-teens margins are sustainable in subsequent quarters (which we have factored in our forecast), driven by sustained pent-up demand for elective surgeries, from both local and foreign patients. Indications are pointing towards recovery in medical travel there as the group is seeing patients from Middle East and Central Asia returning.

1QFY23 India operations top line and EBITDA grew 19% and 36%, respectively, driven by revenue intensity. Its India operation reported strong revenue intensity in 1QFY23 underpinned by inpatient admissions (+8% YoY; -1% QoQ) and average revenue per inpatient (+15% YoY; +5% QoQ) with bed occupancy rate (BOR) rising to 71% vs. 72% in 4QFY22 and 62% in 1QFY22.

5. Hong Kong and Greater China: The group expect Gleneagles Hong Kong (GHK) to achieve operating profit by end-2023. Due to better operational efficiencies and overhead absorption rate as a result of gradual ramp-up in opening new beds, GHK's revenue rose 45% YoY underpinned by higher patient throughput. The group target to open additional 50-100 beds from currently 230 by end 2023. As a testament, GHK EBITDA margins have gradually improved from as low as 2% to 9% in 1QFY23 and on track to achieve operating profit in end 2023. Gleneagles HK continued its growth momentum in 1QFY23 with BOR of 68% vs. 56% in 1QFY22. 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. Ceteris paribus, the deconsolidation of Gleneagles Chengdu in 2QFY23 is expected to narrow losses and boost the group’s overall bottom line.

6. Besides pursuing operational growth, the Group continues to seek earnings-accretive opportunities to acquire strategic assets across Asia and Europe, backed by its healthy balance sheet. It will also focus on improving its return on equity (ROE). The Group will continue to improve group synergies and operational efficiencies. On 14 February 2023, the Group expanded into Türkiye’s third largest city of Izmir with the acquisition of 100% of Kent, which operates the largest private hospital in Izmir. In addition, the Group continually reviews its asset portfolio and will divest any non-core and/or non performing assets at an appropriate time. On 27 February 2023 and 31 March 2023, the Group completed the divestment of Gleneagles Chengdu Hospital and IMU Health, respectively.

7. 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.

Outlook. Looking ahead into 2023, we expect IHH’s revenue per inpatient growth of 10%-15% (vs. 18% in 2022 due to low base effect in 2021), inpatient throughput growth of 10%-15% (vs. 10% in 2022) and bed occupancy rate (BOR) of 60%-73% (vs. 56%-70%% in 2022) for its hospitals in Malaysia, Singapore, India and Türkiye. 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 (previously constrained by staff shortages) and the first full-year contribution from Ataşehir hospital in Acibadem.

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 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, Türkiye 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 Jun 2023