IHH is acquiring Timberland Medical Centre in Sarawak for RM245m cash. We estimate that the valuation is at 12x EV/EBITDA for a private hospital operator commanding an EBITDA margin in the high teens with a profitable bottom line. Pending the completion of the deal, we maintain our forecasts, TP of RM7.00 and OUTPERFORM call.

Expanding footprint in Sarawak. IHH is acquiring the entire equity interest in Bedrock Healthcare Sdn Bhd (BHSB) which owns Timberland Medical Centre in Sarawak for RM245m from Saravita Holdings Sdn Bhd and the medical centre’s nine individual founders on a cash-free debt-free basis. The acquisition will expand IHH’s footprint in Sarawak and will also allow the group to scale up Timberland’s operations via a greenfield hospital. Specifically, BHSB has earmarked a vacant land in central Kuching for the construction of a 200-bed hospital. Briefly, BHSB presently operates an 82-bed private medical centre namely Timberland Medical Centre in Kuching, Sarawak which has been in existence for almost 30 years. It offers a wide range of medical, surgical and hospital services, including cardiology, nephrology, oncology, gastroenterology, hepatology, urology, general surgery and orthopaedic surgery. We believe the target market for this hospital is the middle-higher income group.

We gathered that the valuation is at 12x EV/EBITDA for a private hospital operator commanding an EBITDA margin in the high teens with a profitable bottom line. Driven by procurement synergies and cost efficiency under the cluster strategy, we expect EBITDA margin from this hospital to be above 20% (compared to our FY23F Malaysia’s operation EBITDA margin assumption of 23%). The acquisition will marginally increase IHH’s net debt and net gearing of RM4.5b and 0.16x as at 31 Mar 2023 to RM4.7b and 0.17x. The transaction is expected to be completed by 1HCY24.

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. 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 and SoP-TP of RM7.00 (see Page 2). There is no adjustment to TP based on ESG given a 3-star rating as appraised by us (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, 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 - 11 Aug 2023