IHH expects a pickup in Türkiye after the summer months. It expects sustained performance in Malaysia, while staff shortages in Singapore have been resolved. There is also a return of Middle Eastern and Central Asian medical tourists to its hospitals in Türkiye and India. We maintain our forecasts, TP of RM7.00 and OUTPERFORM call.

Key highlights. We came away from IHH’s post 3QFY23 results briefing feeling positive on its prospects. The key highlights are as follows:

1. Türkiye: Looking ahead into 2024, the group is not perturbed by the lower contribution from Acibadem in 9MFY23 due to the festive holidays in 2QFY23, compounded by long weekend holidays, presidential election and the seasonally slower summer 3QFY23. Viewed as a temporary blip, it expects patients to return in subsequent quarters. Despite the slower summer months, indication is pointing towards a recovery in foreign patient demand. Specifically, its 3QFY23 foreign patient revenue accounted for 20% of revenue vs. 1HFY23 of 17% which is showing improvement. 

Its 9MFY23 Türkiye foreign patient revenue contribution rose 11%. Typically, foreign patients account for 5% of patients but contribute 23%-25% of revenue there. 9MFY23 European operation’s contribution for Acibadem fell marginally to 28% from 30% due to a 50% capacity reduction in operation theatres in Amsterdam hospital which was partially closed for renovation. All in, Acibadem’s normalised 9MFY23 EBITDA margin fell 3ppts from 23% to 20% (excluding a one-off RM25m donation for Türkiye earthquake). The slight margin erosion was due to the less than optimum patient throughput arising from the reasons explained above. The group is optimistic of margin improvement in 4QFY23, as they have seen uptick in demand for Oct and Dec 2023 as patients return following the seasonally low summer period.

2. Singapore: The group indicated that staff shortage issue has been fully resolved. It has gradually re-opened all its blocked beds in tandem with uptick in demand. In May 2023, the Group opened its new Proton Therapy Centre at Mount Elizabeth Hospital in Singapore. The state-of-the art facility is first of its kind among private hospitals in Southeast Asia, providing adult and paediatric patients in Singapore and within the region with access to one of the most advanced forms of precision cancer treatments available. 

Its 3QFY23 BOR was at 62% vs. 59% in 2QFY23, higher due to easing of nursing shortages which led to re-opening of beds. 9MFY23 revenue intensity in Singapore remained robust driven by higher inpatient per revenue (+15% YoY).

3. Malaysia: The group expect growth to continue to be driven by higher bed occupancy and inpatient throughput underpinned by sustained pent-up demand for elective surgeries, from both local and foreign patients for the remainder of CY2023. Beyond 2023, growth is expected to be driven by organic growth of an additional 600 beds (+20% to 3.600 beds) over the next three years. 

Recall, its Malaysia operation reported strong revenue intensity in 3QFY23 underpinned by revenue per inpatient (+6% YoY; -2% QoQ) and inpatient admissions (+11% YoY; +12% QoQ). This was further boosted by case-mix of more acute cases leading to bed occupancy rate of 74% vs 69% in 2QFY23.

4. India: Its 3QFY23 normalised EBITDA margin rose 1ppt to 15% (reported EBITDA margin is 21%) compared to 14% in 2QFY23 due to improved patient volumes and better cost management. 3QFY23 BOR rose to 73% compared to 67% driven by acute case mix with inpatient admissions (+9%) driving revenue intensity. The group in the past reiterated that its EBITDA margin in the mid-teens is sustainable (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. In terms of M&A opportunity, IHH is positive on its acquisition of additional 24.5% stake in GE Medical Associates Private Limited (RGE) which raised IHH’s control in the holding company of Gleneagles Global Hospitals from 73.64% to 98.17%. IHH first invested in the unit in 2015. Since then, it has grown into a chain of six hospitals across Hyderabad, Chennai, Bengaluru, and Mumbai, supported by three feeder centres with a capacity of 1,500 beds. On the other hand, the group is looking to improve under-performing assets. Case in point, it has divest loss-making Fortis Malar Hospital, in-line with its rationalisation strategy to improve profitability. It is targeting to add 1,800 beds in Fortis Healthcare over the next five-years. 

In 9MFY23, India operation’s top line and EBITDA grew 13% and 24%, respectively, driven by revenue intensity. Its India operation reported strong revenue intensity in 9MFY23, underpinned by inpatient admissions (+4%) and average revenue per inpatient (+15%) with bed occupancy rate (BOR) rising to 70% vs. 66% in 1HFY22.

5. Hong Kong and Greater China: GHK in 3QFY23 experienced a slight dip in EBITDA margins to 11% from 15% in 2QFY23 due to increased staff cost following a strong ramp-up in its operations including opening of new beds, and lower BOR. The slight dip in BOR to 64% vs. 67% in 2QFY23 was due to the recent typhoon. Due to better operational efficiencies and overhead absorption rate as a result of gradual ramp-up in opening new beds, GHK's 3QFY23 revenue rose 29% YoY underpinned by higher patient throughput. The group target to open additional 50-100 beds from currently 230 by end-2023.

6. Long-term growth via organic and M&As: The group plans to increase bed capacity >30% or 4,000 beds over the next 5- years across Malaysia, India, Türkiye and Europe. The capacity expansion will also encompass facelifts and renovations to existing facilities, building of extensions, new constructions and relocating some of its complementary ancillary services to alternative sites near the hospitals to avail more space for inpatients. It will continue to seek earnings-accretive corporate opportunities across Asia and Europe, backed by its healthy balance sheet. It will also focus on improving its return on equity (ROE). Case in point - ROE has improved from 4% to 9% as at Sept 2023. The Group will continue to improve group synergies and operational efficiencies. On Feb 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. The Group will expand its footprint to Kuching, Sarawak, upon the completion of the acquisition of Bedrock Healthcare Sdn Bhd in 1HCY24, and plans to scale up the existing 82-bed hospital to a 200-bed hospital with a further investment estimated at RM400m, to serve the local needs in East Malaysia as well as the fast-growing medical tourism market from the region.

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.

Forecasts. Maintained.

We also keep our SoP-TP of RM7.00 (see Page 4). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (also see Page 4).

We continue to like IHH for: (i) the bright prospects of the private healthcare sector in Malaysia underpinned by rising affluence and ageing population, (ii) its pricing power, as the inelastic demand of healthcare provides it with the ability to pass cost through amidst rising inflation, 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 - 4 Dec 2023