We maintain BUY on IHH Healthcare (IHH) with a lower DCFderived fair value (FV) of RM6.39/share (from RM6.49/share previously) to account mainly for the 9.6 sen/share special dividend (ex-date on 30 May 2023). The FV incorporates a 3% premium for our unchanged ESG rating of 4 stars. This implies an FY23F P/BV of 1.9x, close to its 5-year average of 2.0x.
IHH’s 1QFY23 core net profit of RM330mil generally came in below expectations, accounting for 18% of our earlier FY23F earnings and 20% of street’s. As a comparison, 1Q accounted for 21%-23% of FY18-22 core net profit. The deviation was mainly due to higher deferred tax recognised as a result of the adoption of MFRS 129, which led to an increase in carrying value of assets in Turkish operations.
We anticipate that the deferred tax expenses could normalise in upcoming quarters given a moderating inflation rate in Turkiye. For now, we have not accounted for this in our FY23F- 25F assumptions pending a briefing later today.
Nevertheless, we tweaked FY23F-25F earnings by 3%/3%/2% to account for IHH’s disposal of IMU Health business which contributed 1% of group revenue and 2% of EBITDA in FY22.
There was a special dividend of 9.6 sen/share (or 100% of the IMU Health disposal gain of RM845mil). This came in above our earlier DPS forecast of 9.4 sen/share in FY23F, given IHH still have a final dividend to be paid post-4Q result. Therefore, we increase our FY23F DPS assumption to 19 sen/share.
On a YoY basis, IHH registered a 1QFY23 revenue growth of 24%, thanks to the strong recovery of both local and foreign patients seeking treatment at IHH’s hospitals. This can be seen with higher inpatient admission (IA) in Malaysia (+41%), India (+8%) and Acibadem (+14%).
Furthermore, the revenue/IA improved materially in both India (+15%) and Acibadem (+44%) as a result of price adjustments to combat recent inflationary pressures.
IA declined YoY in Singapore (-2%) mainly due to nursing shortages, fully offset by a strong growth in revenue/IA with Singapore rising by 12%, as more acute patients sought treatments in Singaporean operations coupled with price adjustments.
The stronger revenue was further boosted by the commencement of operations at Atasehir Hospital in Sep 2022 and continuous ramp-up of operations at GHK Hospital, as well as the acquisitions of Ortopedia in Aug 2022 and Kent in Feb 2023.
However, IHH’s 1QFY23 core net profit fell 19% YoY to RM330mil, primarily due to the recognition of an additional deferred tax of RM203mil.
Similarly, IHH's 1QFY23 revenue grew by 6% QoQ, while core net profit decreased by 3%. The stronger revenue growth was primarily supported by higher IA (+2%) and revenue/IA (+12%) for Acibadem. However, the sequential decline in 1QFY23 core net profit was primarily attributable to the recognition of relatively higher deferred tax.
Notably, Singapore’s 1QFY23 EBITDA margin decreased by 1.7ppt QoQ mainly due to reduced revenue/IA, which we believe could normalise in the coming quarters. 1QFY23 EBITDA margins also declined for India (-1.3ppt QoQ) and Acibadem (-4.9ppt QoQ) despite improvements in revenue/IA (+3%-12%).
We continue to favour IHH for (a) potential higher revenue share from foreign IA, which typically commands a higher revenue/IA than domestic patients, (b) re-ignition of the group’s organic growth engine in 2023F-25F in addition to continued acquisitive growth, which includes >2K bed capacity expansions in key regions – Malaysia, India and Turkiye, and (c) strategies to improve ROE, which could lead to a revaluation for IHH.
The stock currently trades at a compelling FY23F PB of 1.7x – 15% discount to its 5-year average of 2x.
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