• BUY, SOP-based TP drops to MYR6.80 from MYR6.90, 18% upside with c.3% FY23F yield. IHH Healthcare’s near-term growth should be pivoted by the inelastic demand for healthcare services, while its bed expansion plan should enable it to boost its regional footprint (its bed occupancy rates are nearing optimal levels). We like IHH’s solid execution strategy and reputable regional footprint. It should also benefit from the pick-up in medical tourism – this should buffer it from the effects of a challenging market environment.

• Key takeaways. We emerged from IHH’s post-results briefing feeling upbeat on its near-term outlook. Growth should remain resilient, underpinned by the inelastic demand for healthcare services – evidenced by its growing patient volume, even though 1Q is usually a weaker quarter due to the spate of public holidays and shorter working months (due to the festive season). Positively, the prices of utilities have started to ease in Europe in 1Q23, in tandem with the normalisation of natural gas prices. While this could lead to a better cost structure for Acibadem, we remain cautious on its escalating labour cost as well as the hyperinflationary environment limiting its margin expansion in the near term. IHH plans to roll out 2,000 beds over the next three years in its facilities in Malaysia, India and Turkey.

• The nursing shortage remains a near-term challenge, as this caps IHH’s ability to expand its bed capacity in Singapore. Note that the group has remained prudent in keeping its bed capacity operating at only 50-60%. IHH has resorted to employing patient care associates (PCAs, which typically handle caregiver tasks) to reduce the workloads of its nurses. To shore up the morale of its nurses, IHH recently implemented a feeder bus service to facilitate the daily commute for its nurses residing in Johor Bahru.

• Medical tourism recovery well on track. The medical tourism division continues to see strong traction as foreign patients return post pandemic. The medical tourism segments in IHH’s Malaysia, Singapore, Turkey and India operations should account for 22%, 5%, 12% and 10% of revenues by country (pre-pandemic percentages were 25%, 5%, 16% and 10%).

• Revisions to estimates and valuation. Post analyst briefing, we trim FY23- 24F net profit by 8% and 6%, in view of its higher costs. As such, our TP drops to MYR6.80, implying 32x FY23F P/E or 0.6SD below its 5-year historical mean of 47x. We ascribed a 0% ESG premium to our intrinsic value, as its ESG score is in line with the country median.

• Key downside risks: Mandatory takeover offer overhang (related to the Fortis deal), lower-than expected patient volume/revenue intensity, and higher-than- expected operating costs.

Source: RHB Research - 2 Jun 2023