IHH Healthcare: Quality isn’t cheap

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IHH Healthcare Bhd
(Dec 12, RM4.80)
Initiate “sell” with a target price (TP) of RM4.65:
The key investment points for IHH include a rising need for healthcare services. Based on a growing and ageing population, we expect increased demand for resources such as food, clean water, energy and healthcare services. Translating into opportunities for growth, key markets fall short of the optimal ratio of three beds per thousand people in developed countries.

Secondly, IHH enjoys an advantage of being a leader in its key markets. Taking advantage of favourable demographics, it operates over 6,800 beds in 38 hospitals, medical centres, clinics and ancillary healthcare businesses. In addition, to help sustain and grow its presence, it currently has approximately 3,000 beds in the pipeline.

Together, this will increase total capacity to 9,800 beds (including health management associates) — within the group’s five-year vision of 8,200 beds.

However, risks include the gestation period for new hospitals. On average, gestation periods can last between three and five years. Operating in different countries, it is also susceptible to translation gain or losses from currency fluctuations and risks arising from changes in the regulatory, economic, environmental and competitive landscape.

We initiate coverage on the group with a TP of RM4.65 per share. This is based on a sum-of-parts (SOP) valuation translating to an implied forward enterprise value/earnings before interest, taxes, depreciation and amortisation of 22 times.

On the whole, we like the group for its capable management, leading position in key markets and exposure across various countries.

Nevertheless, at current price levels, future growth prospects may have been reasonably priced in.

While it has a comparable earnings per share growth to the industry, its return on equity and dividend yield currently stand below the industry average. We have a “sell” recommendation on the company. — TA Securities, Dec 12

 

This article first appeared in The Edge Financial Daily, on December 15, 2014.