IHH Healthcare - RHB Invest 2022-08-29: Brace For Recovery In Medical Tourism; Keep BUY

IHH HEALTHCARE BERHAD (SGX:Q0F)

IHH Healthcare - Brace For Recovery In Medical Tourism; Keep BUY

Reiterate BUY call on IHH Healthcare with new SOP-based target price of MYR7.42 from MYR7.60, 16% upside with ~1% FY22F yield.

IHH Healthcare should benefit from the gradual rebound in medical tourism. Medical tourists to Singapore and Malaysia are now at 17% and 1.5% of pre-pandemic levels, following the upliftment of border restrictions in both countries since April. This, on top of the resilient demand for healthcare services, as well as continuing efforts to minimise its exposure to non-TRY revenue (32% of 1H22 total Turkey turnover vs 1H21’s 28%) from its Eastern Europe segment, justifies our call.

IHH Healthcare (SGX:Q0F) expects the recovery of medical tourist numbers to be its key growth driver in the quarters ahead. In 2Q, medical tourists going to Singapore and Malaysia were at 17% and 1.5% of levels recorded prior to COVID-19, ie post reopening of borders in April.
As the Singapore segment booked numbers that were stronger than what management anticipated (due to the upswing in foreign patients), we have tweaked our revenue intensity assumption for FY22 to S$12,848, from S$12,000.

We expect IHH Healthcare’s depreciation and amortisation costs to increase by 4% y-o-y in 2023, until the effect of MFRS 129 is watered down.
Although there could be a potential impairment risk – given the previous higher restated amounts of non-monetary items under MFRS 129 – we regard this as a one-off entry, and somewhat similar to the net monetary gain (amounting to MYR295.5m) observed in 2Q22.

On 27 Jul, IHH Healthcare completed the redemption of US$500m (MYR2,158m) in perpetual securities via its existing cash balance and loan drawdowns. From the perspective of cash flow, the restructuring exercise will allow the group to pare down its borrowing cost to 3.01% (floating) from 4.25% (fixed), and provide interest payments by up to 50%.
Assuming the company applies a 50:50 cash:loan ratio to fund the redemption exercise, our 2022 net gearing ratio assumption would be adjusted to 0.34, from 0.14.

We trim FY22-23F earnings forecast for IHH Healthcare by 9% and 13%, after factoring in higher depreciation charges ahead, as well as a potentially weak topline from its Turkish unit. These, however, should be offset by robust revenue intensity growth from the foreign patient load.
Maintain BUY recommendation on IHH Healthcare, while our target price for IHH Healthcare drops to MYR7.42.
As the ESG score for IHH Healthcare is on par with our country median, we ascribe a 0% ESG premium or discount to our intrinsic value.
See
Key downside risks: An unfavourable Supreme Court ruling with regards to the acquisition of Fortis, lower-than-expected patient volumes and revenue intensity, and higher-than-expected operating costs.

Alexander Chia RHB Securities Research | https://www.rhbgroup.com/ 2022-08-29

SGX Stock Analyst Report BUY MAINTAIN BUY 2.33 DOWN 2.390