Investment Highlights

• We maintain HOLD on IHH Healthcare (IHH) with a higher fair value (FV) of RM6.64/share (from RM6.17/share previously), primarily to reflect the change in valuation methodology from DCF to Sum-of-Parts (SOP) in Exhibit 1. We are adopting SOP methodology which more accurately reflects IHH’s multiple geographical underlying assets and near- term earnings cycle.

• Our FV implies FY24F PE of 40x, at a slight 5% discount to its 5-year average of 42x. In addition, the FV incorporates a 3% premium with our unchanged ESG rating of 4 stars.

• Post-result briefing last Friday, we maintain FY24F-26F earnings as management guidance remains in line with our assumptions.

• IHH clarified that the QoQ decline in Malaysian hospital operations’ EBITDA margin (-5%-point) in 4QFY23 was mainly impacted by one-off sales & service tax (SST) accruals (RM30mil) and adjustments to nursing salaries. Without the one-off SST, the EBITDA margin should be 25% (vs 25%-28% in 1Q-3QFY23). Given higher staff costs, we maintain FY24F EBITDA margin of 25%.

• For the Indian hospital operation, the 6%-point QoQ decline in 4QFY23 EBITDA margin was primarily due to one-off reversal of expenses related to buying back minority interests of Gleneagles Global Hospitals in 3QFY23. The amount of reversal was not disclosed. All in, the EBITDA margin was stable in FY23.

• Going forward, the group that guided investors should expect an improving Indian margin trajectory, which we consider reasonable as: (a) Fortis Healthcare, in which a 31.1% equity stake was acquired in 2018 by IHH, demonstrated an improvement from a single-digit EBITDA margin to 16%, and (b) there is a margin gap compared to Indian peers ie. Global Health and Max Health delivering higher EBITDA margins of 17%-25% in CY24F.

• For 90%-owned Acibadem, 4QFY23 core EBITDA margin deteriorated into losses as a result of misalignment of medical prices/fees with cost inflation such as staff and medication expenses. Going forward, we conservatively forecast a FY24F EBITDA margin of 15% vs. 18% in FY23.

• For China, we found that IHH is not emphasising on an exit strategy for Parkway Shanghai Hospital but focuses on ramping up clinics to create a networking platform for generating references to the hospital.

• Going into FY24F, we expect revenue to be stronger YoY, supported by the expansion of the group’s bed capacity in Malaysia, India and Turkiye , as well as EBITDA margin improvements for operations in Malaysia and Acibadem.

• We deem that the stock is trading at a fair FY24F PE of 40x vs. its 5-year average of 42x, with a mild dividend yield of 1%.

Source: AmInvest Research - 4 Mar 2024