• Maintain BUY and MYR9.10 TP, 25% upside. We came away feeling upbeat following our visit to IHH Healthcare’s hospitals in Penang. To recap, IHH completed the acquisition of Island Hospital (IHSB) in November, solidifying its position alongside Gleneagles and Pantai Hospital in Penang. We expect IHH’s assets in Penang to continue contributing positively to its Malaysia earnings driven by the affluent population and Penang's thriving health tourism (HT) sector. We incorporate a 0% ESG premium/discount to our TP.

• Key takeaways from the visit. We were pleasantly surprised by IHSB’s pioneering role as the top HT hospital in Penang. Its foreign-to-local patient mix of 60:40% is a key testament to providing the best-in-class patient outcome for healthcare travellers. Given the proximity between IHSB and Gleneagles Hospital Penang (GHPG) being just a stone-throw away, management sees ample opportunity to transfer part of the high-intensity patients to IHSB given GHPG’s bed occupancy rate (BOR) is already at 80%.

• Penang’s demographic. Penang is one of Malaysia’s most densely-populated states with 1.8m residents and has the fifth highest average household income in the country according to Department of Statistics Malaysia (DOSM). The state is not only a major tourist destination, but has also become the most established HT spot in Malaysia. Pre-COVID-19 pandemic, Penang generated HT revenue of MYR750m – accounting for 45% of the country’s HT revenue. A key factor of Penang being a top HT destination is its cultural similarity to Medan, Indonesia (the majority of residents in both areas are descendants of immigrants from Fujian, China, and speak the Hokkien dialect). This is on top of the short travelling distance between the two cities, as well as the availability of medical tourist-friendly hotels.

• Consolidation of Island Hospital. The acquisition of IHSB was completed on 4 Nov, funded via the issuance of sukuk (100% debt) amounting to MYR4bn. We learned that the funding cost was sub-4% and we deem the rate to be competitive. All else being equal, we expect IHSB to contribute 20% of IHH’s Malaysia EBITDA in 2025, driven by a projected 40% EBITDA growth next year. We expect IHSB to be earnings accretive by 2026 (after accounting for depreciation and finance cost of MYR260m).

• Earnings revision and valuation. We make no changes to our earnings for IHH as we had previously baked in IHSB to our estimates. Our SOTP-derived TP of MYR9.10 implies 16x FY25F EV/EBITDA, which is 0.4SD above its 5- year historical average. We still like IHH due to its reputable regional footprint across key regions, expansion pipeline (+33% bed capacity by 2028), and resilient demand for healthcare services. Key risks include lower- than-expected patient volumes and revenue intensity.

Source: RHB Securities Research - 6 Dec 2024