UOB Kay Hian's Philip W has kept his "hold" call and RM6.40 target price for IHH Healthcare Q0F , which is dual listed on both the Bursa and SGX.
The company, which runs hospitals and clinics across the region, recently reported its 3QFY2023 earnings which was within expectations.
For the three months to Sept 2023, IHH reported a core profit of RM352 million, up 11.9% y-o-y and up 12% q-o-q. This brings 9MFY2023 core earnings to RM998 million, down 4.1% y-o-y.
A key driver was Singapore, where revenue was up 14.9% y-o-y. While patient numbers was "flattish", up just 1% y-o-y, each patient paid a bill that's on average up 17% y-o-y. With sustained margins, earnings for Singapore was up 14.2% y-o-y.
"Positively, nursing strength is at full force while new ambulatory care centres should supplement some growth heading into 2024," states Wong in his Dec 1 note.
In Malaysia, another key market, revenue was by 18% y-o-y, with volume up 11% y-o-y while "revenue intensity" was up 6% y-o-y.
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While the company managed growth in its operations in Turkey, the weaker lira ate into the margins of Acibadem, as IHH's Turkish unit is called.
"Acibadem continues to strive for a more diversified revenue base given its economic circumstance, now with 58% of revenue being derived from domestic patients," says Wong. India, another key market, generated a revenue growth of 11% y-o-y.
"Higher insurance penetration and increasing income are structural trends that will support long-term growth," says Wong.
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He has kept his "hold" call and RM6.40 target price, which implies 39.7x FY2024 earnings, or close to -1SD of its five-year mean PE.
"While valuations appear decent relative to its historical valuations, it is not as attractive vs other similarly-profiled large defensive stocks.
"While the nature of its operations is defensive, certain regions in which IHH operates in can be tumultuous. Furthermore, valuations have factored in an earnings recovery in 2024. As such, we have a HOLD recommendation," says Wong.
Tay Wee Kuang of CGS-CIMB Research has similarly kept his call, although he is decidely more bullish with his recommendation to "add" and RM7.70 target price.
Tay believes that IHH has room to improve its ebitda with several growth strategies in place, including in Singapore and Hong Kong where IHH is looking to grow its ambulatory care offerings and improve primary care penetration. By doing so, IHH can make space for "higher revenue intensity treatments", says Tay.
Meanwhile, IHH, which had plans to divest its loss-making China operations, which consists of two hospitals and four clinics, has a change of heart under new CEO Dr Prem Kumar Nair, who took on this role on Oct 1 following the resignation of Dr Kelvin Loh, who went to join AIA as group chief healthcare officer.
As Tay put it, IHH sees an opportunity to run its China operations as an ecosystem with referrals across primary care, outpatient and inpatient care that could lead to a turnaround of its business.
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"We note that this is a shift from its plans to divest its China operations previously, and would likely lead to drawn-out gestational losses, albeit at a minimal impact to the group as a whole, in our view," he adds.
Tay believes that IHH is on track to reach his core patmi estimate of RM1.78 billion for the whole of FY2023 and generate EPS of 17.6%.
For him, re-rating catalysts include achieving double-digit ROE, approval for IHH to commence its mandatory open offer for an additional stake in Fortis.
Downside risks, on the other hand, are margin compression from rising inflation, as well as outsized losses of its gestating assets, especially with management’s rethinking of its divestment plans in China.
IHH's Bursa quoted shares closed at RM5.84, SGX-traded shares held at $1.67, and down 9.73% year to date.
