• Keep BUY and SOP-derived MYR6.90 TP, 20% upside, c.1% yield. IHH Healthcare’s 1Q23 core earnings of MYR355m accounted for 22% and 21% of our and consensus’ estimates. The weaker-than-expected results were mainly due to higher cost of operations as well as depreciation charges relating to the Malaysian Financial Reporting Standard (MFRS) 129. We still like IHH for its reputable regional footprint across key regions and the resilient demand for healthcare services.

• Results overview. 1Q23 core earnings were adjusted for gains on disposal of IMU Health (MYR862m), Gleneagles Chengdu (MYR119m) and net monetary gains of MYR165m from MFRS 129. Hospital revenue across IHH’s key segments posted positive YoY growth, bringing group revenue up 24% YoY. Key drivers were mainly the Turkey and Malaysia divisions. A special dividend of 9.6 sen was declared (payable 30 Jun) in conjunction with the disposal of IMU Health.

• Segmental breakdown. The Acibadem business grew 45% YoY as Turkey saw 14% YoY patient volume growth from the commencement of Atasehir Hospital (in Sep 2022) and acquisition of Kent Group (Feb 2023). The Malaysia segment was driven by 41% YoY growth in patient volumes, offset by a 1% YoY decline in revenue intensity attributed to the return of patients with less acute illnesses. Singapore bed occupancy rate (BOR) edged up 4ppts QoQ to 60% – yet to recover to pre-pandemic levels as Singapore is still facing a nursing shortage. Nevertheless, the Singapore division saw commendable 13% YoY revenue growth thanks to a 12% rise in revenue intensity as a result of a relatively complex case mix, offset by a 2% YoY drop in patient admission volumes.

• No changes to our earnings estimates, recommendation, and TP, pending today’s analyst briefing. Our MYR6.90 TP implies 38x FY23F P/E, which is 0.5SD below its 5-year historical average of 47x. We incorporated a 0% ESG premium/discount to our intrinsic value as IHH’s ESG score is at the country median. We like IHH for its solid execution strategy, reputable regional footprint across key regions, and the resilient demand for healthcare services which should provide earnings resilience despite the challenging market environment. Key downside risks: Mandatory takeover offer overhang on Fortis Healthcare, lower-than-expected patient volume/revenue intensity, and higher-than-expected operating costs.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note: Envisioning a Better Future.

Source: RHB Research - 1 Jun 2023