IHH's 9MFY24 results met expectations. Its 9MFY24 core net profit rose 35% YoY driven by revenue intensity, better yields and a lower tax. We maintain our forecasts and roll forward our valuation base from FY25F to FY26F. Consequently, our SoP-TP is raised from RM7.73 to RM8.11. Reiterate OUTPERFORM call.

Its 9MFY24 core net profit met expectations at 75% each of both our and consensus full-year consensus estimates. No dividend was declared in this quarter which was within our expectation.

YoY, its 9MFY24 revenue increased 23% driven by significant pick-up in its operations across the board due to sustained demand, a case-mix of more acute patients and price adjustments to counter inflation. Overall, its revenue per inpatient admissions were largely higher across the board -higher in Malaysia (+10%), Türkiye (+45%) and India (+9%) and Singapore (+14%). Inpatient admissions rose an average 3% across the board. Correspondingly, EBITDA rose 13% driven by higher yield acute case-mix, reflecting its strategy. This brings 9MFY24 core net profit higher by 35% to RM1,368m due to a lower effective tax rate of 12% (due to recognition of deferred tax credit) compared to 23% in 9MFY23.

QoQ, its 3QFY24 revenue and EBITDA increased 1% and 2%, respectively, excluding effects of MFRS 129. Specifically, inpatient admissions were lower in Türkiye (-5%) on seasonally slower season there. However, it was higher in Malaysia (+7%) and India (+10%) but marginally lower in Singapore (-1%). On the other hand, revenue per inpatient was higher in Türkiye (+7%) and Singapore (+3%) but lower in Malaysia (-1%) and India (-3%).

We came away from IHH's 3QFY24 results briefing feeling positive on its prospects. The key highlights are as follows:

1. Singapore: The ramp-up in beds as staff shortage eased over the past two quarters led to a higher 3QFY24 bed occupancy rate (BOR) of 69% vs. 66% in 2QFY24 despite Mount Elizabeth Orchard's renovation, boosted by revenue intensity. Due to the renovation works at Mount Elizabeth Orchard, the group expect some margin pressure in 1HCY25 as it has to halve its number of beds there which we have factored into our forecasts. It expects 25% of the beds to reopen gradually in 1Q-2QCY25 and the remainder in end CY25. The group is converting its two to four-bedded rooms into single-bedded room and only retaining a small number of four bedded rooms. Typically, single-bedded room generate better yields compared to two and four-bedded. Generally, single-bedded rooms' charges are higher compared to two and four-bedded. Its Singapore operation is constantly moving up the value chain in providing higher yields healthcare services. Due to pent-up demand, it has increased its frequency for the usage of Proton Beam (precision cancer treatments) service.
2. Türkiye and Europe: The group is not perturbed by the slightly lower EBITDA margin in 3QFY24 of 19% from 20% in 2QFY24 due to one-off advertising costs related to promoting its Amsterdam hospital. It is experiencing both local and foreign patients gradually returning since Aug 2024. In 3QFY24, foreign patients' revenue accounts for 17% of its total revenue, which is higher compared to 15% in 2QFY24. Typically, while foreign patients only account for 5% of its total patients, these high-yielding customers contribute 23%-25% of total revenue. Looking into CY25, the group expect to commence operations of its greenfield hospital namely Acibadem Kartal Hospital by early 2025 and expansion of the newly acquired Acıbadem Kent Hospital.
3. Malaysia: Its 3QFY24 EBITDA margin expanded 1ppt QoQ to 26%. Its Malaysia operation reported strong revenue intensity in 3QFY24, underpinned by higher inpatient admission (+7% QoQ; +5% YoY) and revenue per inpatient (+7% YoY; -1% QoQ) as patients flocked back following the slower festive season in 2QFY24. This drove 3QFY24 BOR to 73% compared to 69% in 2QFY24 (partly due to a 5% increase in operational beds). Looking into 2025, the growth will be organic in nature with the addition of 1,300 beds (+46% to 4,300 beds) over the next five years, including 160 beds in FY24. The acquisition of Island Hospital, a 600-bed facility in Penang, on 4 November 2024, has further strengthened the Group's position as a leading healthcare provider in Malaysia The group expects > RM200m in synergies over the next five years from the acquisition when Island Hospital is integrated into the Group. For example, it has partnered with Pelaburan Hartanah Bhd (PHB) for the development of a new medical block adjacent to the current Gleneagles Hospital Kuala Lumpur complex with over 260 beds targeted for completion by 2027. It plans to construct a 200-bed hospital in Sarawak to serve the local needs in East Malaysia as well as the fast-growing medical tourism market from the region. As an indication, medical tourism revenue rose 50% in 1HCY24. Recall, the group will expand its footprint to Kuching, Sarawak, upon the completion of the acquisition of Bedrock Healthcare Sdn Bhd in 1HCY24, and plans to scale up the existing 82-bed hospital to a 200-bed hospital with construction expected to commence somewhere in 2HCY24 with an investment estimated at RM400m.
4. India: The group is optimistic on the outlook in India underpinned by cost efficiency, case mix focusing on high yields and sustained pent-up demand in FY24. As in indication, 3QFY24 EBITDA margin rose to 19% compared to 16% in 2QFY24 due to a more than optimum patient admission (2QFY24 : +10% QoQ) and better cost optimisation strategy. Specifically, EBITDA margin continued to improve following the sale of underperforming Fortis Malar hospital which had been divested (sale completed in Jan-Feb 2024), improved patient volumes, and better cost management. The group reiterated that its EBITDA margin in the mid-teens is sustainable (which we have factored in our forecast), driven by sustained pent-up demand for elective surgeries, from both local and foreign patients. To further improve margins and revenue intensity, it is focusing on oncology and cariology segments which are seeing surge in demand. The group is looking to improve under-performing assets in-line with its rationalisation strategy to improve profitability. In terms of organic growth, it is targeting to add >2,000 beds to 7,000 by 2028 in India via Fortis Healthcare (+1560 beds or +38%) and Gleneagles India (+300 beds or +34%) over the next five years. Its India operation reported strong revenue intensity driven by acute case mix in 2QFY24, underpinned by inpatient admissions (+5%) and average revenue per inpatient (+9%).
5. Hong Kong and Greater China: IHH is optimistic and targeting GHK (currently 300 beds in operation) to be bottom-line positive sometime in early CY25. Due to better operational efficiencies and overhead absorption rate as a result of strong ramp-up in its operations including opening new beds, GHK in 3QFY24 saw its margin expanding to 15% from 11% in 3QFY23.

Outlook. The share price performance of IHH has lagged its peers such as KPJ and SUNWAY. We consider the under- performance unwarranted. IHH trades at 12x EV/EBITDA discount compared to 20x that Columbia Asia paid for Ramsay Sime Darby Health Care. The valuation gap should narrow given IHH's sheer size in terms of profitability and dominant market position in the private healthcare space and easing operational challenges regionally. This is especially so as the locally focused KPJ (MP; TP: RM2.40) and SUNWAY (UP; TP: RM3.35) have seen their share prices rising 68% and 32% YTD, respectively, vs IHH (+19%).

Looking further into 2024, we expect IHH's revenue per inpatient growth of 12%−1 % (vs an estimated 19% in 2 23 due to low base effect in 2 22), inpatient throughput growth of 9%−12% (vs an estimated + % in 2 23) and bed occupancy rate (BOR) of %−3% (vs an estimated average of 65% in 2023) for its hospitals in Malaysia, Singapore, India and Türkiye. We believe the key growth factor for its inpatient throughput and BOR would be revenue intensity from a case-mix with more acute cases and medical tourists, the addition of new beds (previously constrained by staff shortages which are gradually easing).

We expect sustained performance in Malaysia, while staff shortages in Singapore have been resolved.

Valuations. We maintain our earnings forecasts, introduce FY26 number and roll forward our valuation base from FY25F to FY26F. Consequently, our SoP-TP is raised from RM7.73 to RM8.11 (see Page 3). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We continue to like IHH for: (i) its pricing power, as the inelastic demand for healthcare provides it with the ability to pass cost through amidst rising inflation, (ii) the strong recovery in patient throughput, from both domestic and international markets, and (iii) its commanding market position in the private healthcare space with presence in Malaysia, Singapore, Türkiye and Greater China. Reiterate OUTPERFORM.

Key risks to our call include: (i) regulatory risk, (ii) risks associated with overseas operations, and (iii) the lack of political will to roll out a national health insurance scheme.

Source: Kenanga Research - 29 Nov 2024