• Maintain BUY and SOP-derived TP of MYR7.42, 24% upside with c.1% yield. 9M22 earnings were below expectations, mainly due to a decline in COVID-19-related revenues and weakening TRY. However, we continue to favour this stock, as we believe IHH Healthcare’s recovery remains on track given the resilient demand for healthcare.

• Earnings below expectations due to weaker-than-expected EBITDA from IHH’s Malaysia, India, and Acibadem operations, which represent 69%, 71%, and 63% of our FY22 forecasts. Its 9M22 core earnings of MYR1,065m (-2.2% YoY) made up 72% and 65% of our and Street’s FY22 estimates.

• Solid recovery for Malaysia. Operationally, revenue intensity dropped 16% YoY in 3Q22 – offset by the growth in inpatient admissions (+57% YoY) post reopening of borders – while bed occupancy improved significantly to 70% (3Q21: 48%, 2Q22: 61%). This led to a 24% growth in EBITDA. We continue to expect recovery in Malaysia to remain intact, supported by domestic electives and disciplined cost measures.

• Singapore EBITDA dropped 14% YoY in 3Q22 despite a 32% increase in revenue intensity due to cost pressures from nursing shortages on salaries, which resulted in lower margins. Inpatient admissions also dropped 4% YoY as a result of nursing shortages, leading to constraints on bed capacity.

• India’s performance was slightly weaker YoY. Despite increasing patient admissions (+6% YoY) and higher revenue intensity (+8% YoY), India’s EBITDA fell 1% in 3Q22 – likely due to increases in operational costs. However, the relatively huge scale in India should allow IHH to better manage the rising operational costs by ramping up productivity. We anticipate a growth in its domestic electives and recovery in medical travel in the coming quarters.

• Acibadem still posted weaker earnings. Despite higher revenue intensity (+45% YoY) in 3Q22, the weakening TRY vs the MYR and lower inpatient admissions (-1% YoY) eroded EBITDA (-23% YoY). However, we remain optimistic on Acibadem’s earnings through IHH’s continuous efforts to expand its non-TRY contributions (46% in YTD22 vs 41% FY21).

• We make no changes to our FY22F-24F earnings, recommendation, and TP, pending the analysts briefing on 30 Nov. This counter is still trading at an undemanding 13x FY23F EV/EBITDA (-1SD of its 5-year mean). We ascribe a 0% ESG premium/discount to our intrinsic value, as IHH’s ESG score is in line with the country median.

• Key downside risks. Mandatory Takeover Offer or MTO overhang on Fortis, lower-than-expected patient volume/revenue intensity, and higher- than-expected operating costs.

Source: RHB Research - 30 Nov 2022