IHH Healthcare: Procedure Mix Improvement & Bed Expansion Growth Driver (OTCMKTS:IHHHF)

IHH Healthcare Berhad (OTCPK:IHHHF) (IHH:MK) stock is now assigned a Buy investment rating. IHH Healthcare’s 1H 2024 results beat expectations and see the company’s stock trading higher with multiple expansion driven by a positive growth outlook. The company’s main growth engines are a more favorable mix of procedures and an increase in bed capacity.

My previous writing of October 2, 2020 discussed the weak results of the IHHHF in Q2 2020 and the prospects for a recovery in the second half of the year.

The company’s shares are traded on the Malaysian stock exchange Bursa Malaysia and the Over-The-Counter market. IHH Healthcare’s OTC shares have low trading liquidity, but its Malaysian-listed shares boasted a three-month average daily trading value of $7 million, according to S&P Capital IQ data. Investors can trade IHH Healthcare’s liquid Malaysian shares with international brokers such as Hong Kong’s Monex Boom Securities and OCBC Securities in Singapore.

IHHHF reported results above 1H expectations due to a favorable procedure mix

On its corporate website, IHH Healthcare describes itself as one of the world’s largest private healthcare groups” operating “more than 80 hospitals in 10 countries”.

International Hospital Network of IHHHF

Top line and EBITDA for IHH Healthcare expanded significantly by +23% YoY and +26% to RM12,048 million and RM2,748 million respectively for the first half of this year. IHHHF disclosed its financial performance for the interim period 2024 with the results announcement published on 29 August.

Ahead of the release of the company’s H1 2024 results, analysts’ consensus sell-side FY 2024 and EBITDA forecasts for IHHHF were RM22,524 million and RM5,075 million, respectively, according to S&P Capital IQ consensus data. In other words, IHH Healthcare’s actual revenue and EBITDA for 1H 2024 were 53% and 54% of the respective consensus estimates. This means that the company’s interim results in 2024 exceeded expectations.

IHHHF indicated on the company’s 1H 2024 analyst call (transcript sourced from S&P Capital IQ) that its strong interim performance was driven by “higher (revenue) intensity across all of our key markets” achieved by “doing higher technology, equity procedures”.

The key measure of revenue intensity for IHH Healthcare is the amount of revenue divided by the number of admissions. Specifically, IHHHF’s revenue per eager admission increased by +17%, +10% and +9% for the Singapore, India and Malaysia geographic markets respectively in the first half of 2024.

In its 1H 2024 results slides, IHHHF noted that its hospitals in Singapore, India and Malaysia benefited from “improved case mix”, “more complex cases” and “complex treatments”, respectively. It is only natural that the company’s revenue on an admissions basis increases when it sees an increase in the number of procedures that are more challenging and involve higher costs. For example, “proton beam therapy” is about three times more expensive than “conventional radiation therapy,” according to IHH Healthcare’s 1H 2024 earnings briefing notes. Therefore, IHHHF’s financial performance gets better assuming the company continues to benefit of an increasing revenue contribution from high-quality procedures (eg “proton beam therapy”, etc.) at a premium price.

At its 2024 interim analyst briefing, IHH Healthcare noted that it saw “signs of (high revenue intensity) sustained throughout the (full) year” based on what it saw at the start of 2H 2024. This suggests that there is a reasonably good chance that IHHHF will perform well in the near future as the company’s mix of procedures remains favorable according to its disclosures.

Growth prospects are strong with capacity expansion plans

IHH Healthcare operated hospitals with a total of more than 12,000 beds as of June 30, 2024, and a significant increase in bed capacity will support the company’s growth in the medium term.

In specific terms, IHHHF has set a target of expanding its capacity by an additional 4,000 beds between 2024 and 2028. This implies that the company’s hospital bed capacity has the potential to increase by a third in the next five years. .

About 40% and 29% of the planned 4,000 new bed additions will be in the Indian and Malaysian markets, respectively, as indicated in IHH Healthcare’s interim results presentation slides. In my opinion, IHHHF has made the right decision to choose India and Malaysia as key markets for capacity expansion.

According to the most recent data available from the World Bank, annual per capita healthcare expenditure for Singapore, Malaysia and India was approximately US$3,970, US$487 and US$74 respectively. It will be reasonable to believe that there is room for healthcare spending in Malaysia and India to increase in the coming years and close the gap with other more developed Asian healthcare markets such as Singapore.

I believe the market has yet to factor in the positive growth prospects for IHH Healthcare in its valuations. According to S&P Capital IQ data, the company’s consensus FY 2023-2025 normalized EPS CAGR is a strong +27%. This is supported by its plans to expand capacity and improve the mix of procedures mentioned in the previous section.

A typical listed company is usually considered to be fairly valued at a price-to-earnings growth PEG ratio of 1x. Given that IHH Healthcare is a leading hospital operator with exposure to Asian healthcare markets with good growth potential, my view is that IHH Healthcare deserves to trade at a higher PEG than the average stock. A premium of 15% implying a PEG of 1.15 times will be appropriate in my opinion.

IHH Healthcare’s current PEG ratio is 0.85x, based on its consensus trailing twelve month normalized P/E of 23x and FY2023-2025 forecast CAGR of +27%. A target PEG ratio of 1.15x will translate into capital appreciation potential of approximately +35%.

Variant view

There are two key risks to consider before investing in IHH Healthcare.

One risk factor is that the IHHHF case mix becomes unfavorable, assuming that fewer complex procedures are still performed.

The other risk factor is that IHH Healthcare is increasing its bed capacity by less than the 4,000 beds it has targeted by 2028.

Conclusion

IHH Healthcare’s rating is upgraded from a previous Hold to a Buy now. The company’s financial performance for the interim period 2024 was better than expected, and growth prospects are strong.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.