IHH Healthcare Bhd(MY 5225)：Profit Shrinkage is a Major Concern

The majority of the company's revenue comes from its Parkway Pantai division, which operates hospitals and provides medical services in Asia, with its primary markets being Singapore and Malaysia. The second largest source of revenue is Acibadem Holdings, a hospital operator and service provider in Central and Eastern Europe, the Middle East, and North Africa.

Revenue: Total revenues for Q1 2024 reached RM 5,955.5 million, representing a year-on-year increase of 16%. This growth was driven by sustained demand for quality healthcare services, a case-mix of more acute patients, and price adjustments to counter inflation. Additionally, Ozel Kent Saglik Hizmetleri ve Malzemeleri Sanayi Ticaret A.S. (“Kent”), acquired on 14 February 2023, and Bedrock Healthcare Sdn. Bhd. (“Bedrock”), acquired on 29 February 2024, also contributed to the increase.

Notably, Q1 2024 other operating income decreased from a high base in Q1 2023, during which gains on the disposal of IMU Health and Gleneagles Chengdu Hospital of RM 862.0 million and RM 116.5 million, respectively, were recognized.

EBITDA & PATMI(Profit After tax and Minority Interests): The Group’s Q1 2024 EBITDA increased by 16% compared to Q1 2023. Excluding the effects of MFRS 129, EBITDA rose by 20%. Q1 2024 PATMI, excluding exceptional items (“PATMI (Excl EI)”), increased by 22% to RM 402.8 million. When excluding the effects of MFRS 129, PATMI (Excl EI) grew by 30% over Q1 2023.

In Q1 2024, staff costs increased 19% yoy as the Group expanded its capacity to cater to higher demand for its services and annual increments. Operating lease expenses grew by 12%, while other operating expenses increased by 8%, and finance costs surged by 39%.

These substantial increases in expenditures resulted in a 40% year-on-year decrease in net profit, which amounted to RM 925.4 million. The company's profit attributable to owners was about 768 million Malaysian ringgit, down 45% from 1.39 billion ringgit a year earlier.

The company's Q1 Basic EPS was 8.72, nearly halving from last year's 15.79.

Since its 3Q23 analyst briefing, IHH has outlined plans to add approximately 4,000 beds across key regions by 2028. Despite a slight decline in bed capacity from 4Q23 to 1Q24 (from 12,307 to 12,166 operational beds), IHH has achieved organic growth by enhancing case mix to boost revenue intensity. In Singapore, where capacity expansion is limited, IHH saw an 18% year-on-year revenue growth by focusing on Oncology and introducing proton beam therapy, despite higher post-pandemic living costs deterring medical tourists.

IHH’s healthy balance sheet, with a net gearing of 0.26x as of 1Q24, allows it to pursue accretive M&As, particularly in Malaysia, India, Turkey, and Europe, leveraging its cluster strategy for improved profitability. Management also indicated ongoing exploration of expansion opportunities in Indonesia and Vietnam during the 28 May analyst briefing.

JP Morgan has rated IHH as "Overweight" with a target price of RM7.00. The company currently has a TTM P/E ratio of 23.58x and has gained 4.6% year-to-date, although it has retreated since its peak at the end of April. Despite concerns over net profit and EPS in the Q1 report, the market remains some confident in IHH’s stable revenue and EBITDA growth, avoiding a significant downturn.

The company's TTM dividend yield is 1.44%, which is relatively low. No dividends were declared or paid during the financial period ended 31 March 2024. Historically, the company's dividend levels have been average and not particularly stable.

In conclusion, although the company's halved profit hasn't led to a significant drop in stock price, it has also left the market lacking strong confidence in its valuation. The reduced profit has negatively impacted both valuation and shareholder returns, making the investment appeal limited at present. Therefore, investors may prefer to take a wait-and-see approach regarding the company's profit recovery.