This article first appeared in The Edge Financial Daily, on October 8, 2015.

IHH Healthcare Bhd
(Oct 7, RM6.18)
Upgrade to buy from hold with a revised target price of RM7.14 from RM5.15: We expect IHH Healthcare’s (IHH) revenue growth in the next two years to stem from the operations of its new hospitals in Malaysia, Turkey, India and Hong Kong.

Upon their completion, these new hospitals will add an additional capacity of 1,720 beds with the bulk coming from its future largest hospital, Gleneagles Hong Kong with 500 beds. The pricing for the current premium healthcare in Hong Kong is also 30% to 50% higher than its home market in Singapore.

IHH’s Malaysia operation is expected to have two new hospitals by end-2015, namely Gleneagles Kota Kinabalu and Gleneagles Medini.

Currently, IHH has operationalised 35% of its Gleneagles Kota Kinabalu’s total capacity and the current occupancy rate is 40% to 50%.

For Turkey, its Acibadem Taksim is expected to be completed by the second half of 2015 (2H15).

Another upcoming hospital from IHH is the Gleneagles Khubchandani in India. Its completion date is slated for mid-2016.

Accordingly, we expect IHH to be able to increase its earnings before interest, taxes, depreciation, and amortisation (Ebitda) margin going forward.

IHH is currently carrying out expansions across its various home markets. Its Turkey operation is expected to add another 182 beds to existing hospitals via expansions of Acibadem Sistina Skopje and Acibadem Bodrum phase 2. Their focus is on oncology. We expect this to increase the Ebitda margin for Turkey as oncology is categorised under the tertiary and quaternary care which carry higher profit margins compared with primary and secondary care.

For Malaysia, IHH will be expanding its Gleneagles Kuala Lumpur by 100 beds this year.

Meanwhile, its Pantai Hospitals (Klang, Air Keroh and Kuala Lumpur) will be adding another 360 beds by 2017.

We do not foresee any material movement in profit margins for Malaysia as these expansions are focused on secondary care.

Malaysia’s medical tourism earnings growth is expected to grow at a compound annual growth rate (CAGR) of 18.5% from 2014 to 2020.

This will be supported by the increase in healthcare expenditure which is expected to grow at a CAGR of 11% in the next five years.

We expect IHH to benefit from this as the group has a substantial presence in Malaysia.

IHH has also set up four hospitals in Singapore with its latest hospital being the Mount Elizabeth Novena. Mount Elizabeth Novena has been successful from the beginning as its gestation period was only 12 months, compared with the average of two to three years for other hospitals. — MIDF Amanah Research, Oct 7