IHH expects its earnings momentum to accelerate, underpinned by revenue intensity and rising demand in 2HFY24. This would be supported by higher yield services both in Singapore, return of medical tourists in Acibadem, and post-election effect in India. We maintain our forecasts, TP of RM7.73 and OUTPERFORM call.

Undemanding EV/EBITDA valuation. The share price performance of IHH has lagged its peers such as KPJ and SUNWAY. We consider the under-performance unwarranted. IHH trades at 12x EV/EBITDA discount compared to 20x that Columbia Asia paid for Ramsay Sime Darby Health Care. The valuation gap should narrow given IHH’s sheer size in terms of profitability and dominant market position in the private healthcare space and easing operational challenges regionally. This is especially so as the locally focused KPJ (MP; TP: RM1.95) and SUNWAY (UP; TP: RM2.66) have seen their share prices rising 36% and 69% YTD, respectively, vs IHH (+4%).

We came away from IHH’s post 2QFY24 results briefing feeling positive on its prospects. The key highlights are as follows:

1. Singapore: The staff shortage issue is easing gradually. As an indication, 2QFY24 bed occupancy rate (BOR) rose to 66% driven by higher inpatient admissions (+5%) compared to 63% in 1QFY24. The group is experiencing a surge in demand for single- bed room. To recap, it is converting its two to four-bedded rooms into single-bedded room and only retaining a small number of four bedded rooms. Typically, single bedded room generate better yields compared to two and four bedded. Generally, single bedded rooms’ charges are higher compared to two and four bedded. Similarly, 2QFY24 revenue intensity in Singapore remained robust, driven by higher revenue per inpatient (+13% YoY; 1-% QoQ). Its Singapore operation is constantly moving up the value chain in providing higher yields healthcare services. Case in point, is the opening of its Proton Therapy Centre at Mount Elizabeth Hospital in Singapore in May 2024 providing state-of-the art facility focusing on precision cancer treatments. Due to pent-up demand, it has increased its frequency for the usage of Proton Beam service.
    
2. Türkiye and Europe: The group is not perturbed by the lower contribution in Acibadem in 1HFY24 no thanks to the longer-than- expected holidays declared for the festive season in 2QFY24. Seasonally, it expects 2H to be better than 1H in Türkiye and Europe. It is experiencing both local and foreign patients gradually returning in Aug 2024. In 2QFY24, foreign patients’ revenue accounts for 15% of its total revenue, which is higher compared to 13% in 1QFY24. Typically, while foreign patients only account for 5% of its total patients, these high-yielding customers contribute 23%-25% of total revenue.
   
   In 2QFY24, the contribution from Acibadem’s Europe operation was marginally higher at 28% from 27% in 1QFY24 underpinned by gradual re-opening in operation theatres in its Amsterdam hospital which was partially closed for renovation in 1QFY24. Acibadem’s core EBITDA margin came in slightly lower at 20% compared to 21% in 1QFY24 due to less-than-optimum patient throughput arising from the reasons explained above. The group is optimistic of margin improvement in FY24 underpinned by uptick in demand in the seasonally higher 2H. In FY24, it plans to add 120 beds (+5%) and 310 beds (+30%) in Türkiye and Europe.
    
3. Malaysia: Beyond 2024, the growth will be organic in nature with the addition of 1,300 beds (+46% to 4,300 beds) over the next five years, including 160 beds in FY24. For example, it has partnered with Pelaburan Hartanah Bhd (PHB) for the development of a new medical block adjacent to the current Gleneagles Hospital Kuala Lumpur complex with over 260 beds targeted for completion by 2027. Its 2QFY24 EBITDA margin was 25%, unchanged QoQ and it is targeting FY24 EBIDTA margin of 24%-25%. Its Malaysia operation reported strong revenue intensity in 2QFY24, underpinned by higher inpatient admission (+6% QoQ; +10% YoY) and revenue per inpatient (+10% YoY; +1% QoQ) as patients flocked back following the slower festive season in 1QFY24. This drove 2QFY24 BOR to 69% compared to 67% in 1QFY24 (partly due to a 5% increase in operational beds).
   
   It plans to construct a 200-bed hospital in Sarawak to serve the local needs in East Malaysia as well as the fast-growing medical tourism market from the region. As an indication, medical tourism revenue rose 50% in 1HCY24. Recall, 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 construction expected to commence somewhere in 2HCY24 with an investment estimated at RM400m.
    
4. India: The group is optimistic on the outlook in India underpinned by cost efficiency, case mix focusing on high yields and sustained pent-up demand in FY24. It is not perturbed by the temporary lower EBITDA margin in 2QFY24 at 16% compared to 19% in 1QFY24 due to less than optimum patient admission (2QFY24 : +5% QoQ) as a result of the month long election there. We expect EBITDA margin to improve following the sale of underperforming Fortis Malar hospital which had been divested (sale completed in Jan-Feb 2024), improved patient volumes, and better cost management. The group 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. To further improve margins and revenue intensity, it is focusing on oncology and cariology segments which are seeing surge in demand. The group is looking to improve under- performing assets in-line with its rationalisation strategy to improve profitability. In terms of organic growth, it is targeting to add >2,000 beds to 7,000 by 2028 in India via Fortis Healthcare (+1560 beds or +38%) and Gleneagles India (+300 beds or +34%) over the next five-years. Its India operation reported strong revenue intensity driven by acute case mix in 2QFY24, underpinned by inpatient admissions (+5%) and average revenue per inpatient (+9%).
    
5. Hong Kong and Greater China: In Shanghai, IHH is building a hub-and-spoke model. Its strategy is to improve underperforming Parkway Shanghai Hospital by increasing patient volumes through building a seamless integration of referrals between Parkway Shanghai hospital and four of its clinics in Shanghai. In 1HCY24, its clinics there are EBITDA breakeven currently. IHH is optimistic and targeting GHK (currently 300 beds in operation) to be bottom-line positive sometime in CY24-CY25. Due to better operational efficiencies and overhead absorption rate as a result of strong ramp-up in its operations including opening new beds, GHK in 2QFY24 saw its margin expanding to 16% from 14% in 1QFY24. GHK's 2QFY24 revenue rose 8% QoQ and 22% YoY underpinned by higher patient throughput.
    
6. 1HFY24 prices pegged to CPI, inelastic demand. It has pegged its charges to patients to consumer price index (CPI) across all its key markets. Across all its key markets IHH operates in, prices were adjusted for inflation in 1HFY24 to realign with the corresponding cost increases. Despite the high inflationary pressure in Turkey, the group is unperturbed by any potential slow-down in demand there. 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.
    
7. Long-term growth via organic and M&As: Backed by its healthy balance sheet, it is still in the midst of looking for potential mergers and acquisitions (M&As) in Indonesia and Vietnam, with a focus on deals that are earnings accretive and offer significant synergies. Looking ahead, 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 also focus on improving its return on equity (ROE). Case in point - ROE has improved from 6% in 2022 to 11% as at Dec 2023. The Group will continue to improve group synergies and operational efficiencies. As part of the Group’s efforts at deploying AI and other innovative technologies to elevate patient care and to provide more holistic healthcare solutions, the Group recently invested in an AI start-up for diagnosing sleep apnea and other sleep issues.

Outlook. We believe investors should now focus on earnings catalysts in FY24 such as: (i) the return of foreign patients in Türkiye, (ii) nurse shortages resolved in Singapore and Malaysia, and (iii) improving margins arising from disposal of under- performing assets and the return of patients from Middle East and Central Asia in India. IHH trades at 12x EV/EBITDA compared to 20x that Columbia Asia paid for Ramsay Sime Darby Health Care in Nov 2023. Looking ahead in 2024, we expect IHH’s revenue per inpatient growth of 12%−16% (vs. an estimated +19% in 2023 due to low base effect in 2022), inpatient throughput growth of 9%−12% (vs. an estimated +7% in 2023) and bed occupancy rate (BOR) of 65%−73% (vs. an estimated averaging 65% in 2023) for its hospitals in Malaysia, Singapore, India and Türkiye. We believe the key growth factor for its inpatient throughput and BOR would be revenue intensity from a case-mix with more acute cases and medical tourists, the addition of new beds (previously constrained by staff shortages which are gradually easing). We expect 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.

Forecasts. Maintained.

Valuations. We also keep our SoP-TP of RM7.73 (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). IHH trades at 12x EV/EBITDA compared to 20x that Columbia Asia paid for Ramsay Sime Darby Health Care in Nov 2023. The private healthcare sector has attracted significant attention from investors of late due to: (i) the recent acquisition of Ramsay Sime Darby Health Care by Columbia Asia Healthcare (at premium valuations), and (ii) the impending listing of Sunway Healthcare Group (potentially also at premium valuations). KPJ (MP; TP: RM1.95) and SUNWAY (UP; TP: RM2.66) have seen their share prices rising 36% and 69% YTD.

Investment case. 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 - 2 Sep 2024