Key takeaways from IHH’s 2Q24 analyst briefing:

Expect a Resilient 2H24

Moving into 2H24, IHH’s bed occupancy rates are expected to carry on with the satisfactory 70% achieved in 1H24, in-line with the growing healthcare needs and quality healthcare services. Moreover, IHH would maintain a tight rein on costs while at the same time, leading the way in value-driven outcomes with the aim to transition to value-based healthcare. This is important as healthcare cost is expected to continue going up due to medical inflation, nursing shortage and technology advancement. More importantly, value-based healthcare would not impact revenue intensity.

Singapore is expected to continue to deliver on higher revenue intensity while Turkiye & Europe operations would tend to improve in 2H24 due to seasonality. Growth would also come from its significant patient base, Eastern Europe expansion and foreign patients. In India, management said that the group will continue to provide essential service despite the protest which has insignificant impact. Overall, we expect IHH’s FY24 EBITDA margin to improve to 23.6% (vs. 22.5% in 1H24).

Malaysia Operations Continues to Deliver

IHH Malaysia 2Q24 revenue and EBITDA increased by 15% and 14% YoY to RM1.0bn and RM253mn, respectively on the back of higher inpatient revenue intensity of 7% to RM10,702 as well as higher inpatient admission of 10% to 62,331. Management shared that 1H24 medical tourism revenue surged by 50%, primarily due to a rise in Indonesia medical travellers into Malaysia. Moving forward, IHH would focus on extending its leadership position by growing capacity organically, adding 46% (1,300 beds) over the next 5 years and exploring earnings accretive acquisitions. The recent addition of Timberland Medical Centre has strengthened IHH’s presence in Sarawak and is expected to attract more foreign patients from neighbouring countries, particularly Indonesia.

Recently, IHH was quoted in the press as one of the potential suitors for the 600-bed Island Hospital in Penang. If successful, it would mean the group will secure a third hospital on the island, in addition to its current Gleneagles Hospital in George Town (360 beds) and Pantai Hospital in Bayan Lepas (190 beds). Overall, we believe that this would bode well for the group given that Island hospital is one of the top medical tourism hospitals in Malaysia. As for EBITDA margin, we expect IHH Malaysia’s EBITDA margin to dipped slightly to 25% (vs. 26.7% in FY23) due to higher staff costs to cater for the aggressive expansion plan in FY24. Note that the group is still in-the-midst of looking for potential M&As in Indonesia, Vietnam, Malaysia and Europe.

IHH China Continues to Ramp Up

IHH’s Greater China operations reported an EBITDA of RM69mn but a loss before tax of RM130mn in 1H24. In Hong Kong, Gleneagles Hong Kong (GHK) 2Q24 revenue and EBITDA rose by 22% and 31% to RM356mn and RM59mn respectively. Management guided that GHK is on track to be PATMI positive by 1Q25 as the group expand bed capacity and offerings.

As for IHH China, the group is focusing on turning around underperforming assets through seamless collaboration between Parkway Shanghai and clinic network. IHH has revamped its clinics into a sustainable business and would continue to improve insurance penetration and set up a new ambulatory centre (ACC). Management added that clinics are now at EBITDA positive. Meanwhile Parkway Shanghai hospital would focus on providing a full spectrum of services across different specialties, attracting medical talent and ramping up operations. In all, the hub and spoke model will enhance referrals and streamline operations, optimising operating efficiency. We believe that the new ACC would be convenient, acting as a 1 stop-hub for day surgical services, rehab, check-ups, post treatment, which may boost Parkway’s occupancy rates.

Impact

We revise our revenue per inpatient for Turkey & Europe operations by 13.7% and lowered our tax rate by 2pts. Consequently, we have adjusted our FY24/25/26 net profit projections to RM1.64/1.71/1.81bn, from the earlier estimates of RM1.51/1.60/1.72bn.

Valuation

Maintain our Hold recommendation on IHH with a target price of RM6.88/share based on SOTP valuation.

Source: TA Research - 2 Sept 2024