IHH Healthcare - Strong franchise value but look for lower entry level HOLD

- We initiate coverage on IHH Healthcare Bhd (IHH) with a HOLD recommendation and a fair value of RM3.07/share, based on a sum-of-parts valuation. 

- IHH has a leading market position in three markets, namely, Singapore, Turkey and Malaysia, constituting 35%, 31% and 26% of EBITDA, respectively. 

- We forecast earnings to expand by 26% in FY13F and  with a stronger growth of 43%, thereafter. This translates into robust 3-year earnings CAGR of 47% underpinned by an increase in bed capacity of 9% and 10% for FY13F and FY14F, respectively. Acibadem is estimated to lead in FY13F EBITDA contribution at 37%, followed by Singapore at 35%.

- This is attributable to the ramp-up at Mount Elizabeth Novena in Singapore to 333 beds by 2HFY13 from 180 beds since its opening in July FY12.  Novena is expected to turn EBITDA positive within a year. Singapore’s total bed capacity will rise by 17% to 1,049 beds in FY13F.  

- Turkey’s expansion is well in progress (+40% to 2,520 beds by FY15F) – +235 beds via expansion of its existing hospitals and potentially >+330 beds via an acquisition as well as the setting up of a new hospital. Two hospitals (+154 beds) –Ankara and Bodrum – opened last year. 

- Acibadem is expected to have a strong revenue growth of nearly 20%, faster than Singapore’s circa 12%, based on our FY13F estimates. This is driven by medical tourism across CEEMENA and an increasing demand for private healthcare. 

- Meanwhile, Malaysia’s operations will see three greenfield projects (+650 beds) and the expansion of four existing hospitals (+268 beds) by FY15F. The expansion of its two flagship hospitals in Kuala Lumpur (Pantai and Gleneagles), should support a higher inpatient volume.

- Net gearing is manageable at 7%. This supports potential acquisitions, for IHH to further embark on an accelerated expansion in key markets as well as highly-regulated and largelyunderserved markets. The annual budgeted capex is RM300mil. 

- Our implied forward EV/EBITDA multiple is at 20x FY13F, 33% above the regional peers’ average. A strong earnings trajectory appears to have been priced in. We will turn more constructive on the stock at a lower entry level. On a cautious view, the six-month moratorium period for cornerstone investors (i.e. Blackrock, Alliance Bernstein) that ended late- January may have exerted selling pressure.

- Nevertheless, we like IHH’s long-term growth prospects underpinned by:- (1) Expansion plan mapped out and well ontrack; (2) Leading position in Singapore, Malaysia and Turkey; and (3) Strong franchise value and well-established brand name.

Source: AmeSecurities