IHH’s 1HFY23 results disappointed. Its 1HFY23 core net profit contracted 11% YoY as top line growth, driven by the economy reopening, expansion and M&As, was negated by weak profits from Singapore and Turkiye. We take comfort in the rising trend in both patient throughput and yields. We cut our FY23F net profit by 5% but maintain our TP of RM7.00 and OUTPERFORM call.

Its 1HFY23 core net profit of RM645m (-11% YoY) came in below expectations at only 39% and 38% of our full-year forecast and the full year consensus estimate, respectively. The variance against our forecast came largely from weaker-than-expected performances from its operations in Singapore and Turkiye.

YoY, its 1HFY23 revenue increased 15% driven by the return of both local and foreign patients, the opening of Atasehir Hospital, the expansion at Gleneagles Hong Kong hospital and the acquisition of Ortopedia hospital. Overall, its inpatient admissions were largely higher across the board - higher in Malaysia (+27%), Turkiye (+8%) and India (+4%) but lower in Singapore (-3%). Revenue per inpatient rose in Singapore (+13%), Turkiye (+43%), India (+15%) and Malaysia (+2%). Consequently, its EBITDA rose 9% due to better operational efficiencies. However, its core net profit declined 11% due to lower contributions from its operations in Singapore and Turkiye.

It declared a first interim dividend of 3.5 sen which is within our expectation.

Outlook. Looking ahead in 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 it moved on from an earlier earthquake. 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.

Forecasts. We downgrade our FY23F net profit by 5% as we reduce our EBITDA margin assumption for operations in Singapore and Turkiye to 22.5% and 22% from 23% and 23%, respectively. However, we keep our FY24F numbers.

We also keep our SoP-TP unchanged at RM7.00. There is no adjustment to our 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, 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 - 30 Aug 2023