IHH HEALTHCARE, Asia’s largest healthcare group and the world’s third largest IPO this year, has ended its first week of trading at 1.285, up 15% from its offer price of $1.113. The stock, dual-listed on the Kuala Lumpur bourse too, ended the week at RM3.15 ($1.25), up 12.5% from its offer price of RM2.80.
Perhaps, as a reflection of investors’ interest in this counter -- you just have to look at the number of times the issue was oversubscribed -- there are already formal coverage on this stock. On July 25, CLSA analyst AC Tan recommended investors to load up on IHH, with a “buy” call and target price of RM3.55, in a report with the title “Just what the doctor ordered”.
Other brokers that have initiated coverage of IHH, according to Bloomberg data, are: Hong Leong Investment Bank, with a buy call and target price of RM3.49; Affin Securities, recommending investors to “add” with price target of RM 3.15; SJ Securities with an “overweight” call and target of RM3.30 and ECM Libra, with a “hold” call of RM2.94.
Although there are many examples of IPOs that drew plenty of interest at the book building stage but were quick to fizzle out, Tan of CLSA believes IHH will not suffer from the same fate. “We believe the interest in the name will continue post IPO,” says Tan. The way he sees it, the healthcare giant is in a sweet spot of Asia's booming healthcare industry. Tan expects the rising ranks of middle-class consumers and the general lack of decent healthcare services to help boost demand. “On the back of that, we believe the company will display defensive and steady earnings growth as its hospital occupancy increases and revenues per patient intensifies from higher value products,” he writes.
The company runs 30 hospitals, mainly in Singapore, Malaysia and Turkey, but also five other countries. IHH’s main operating pieces include Pantai Malaysia, the country’s second largest hospital chain, as well as Parkway Singapore, operator the largest group of private hospitals here. IHH also owns a three-quarter stake in Acibadem, the largest hospital chain in Turkey. It operates more than 4,900 beds and there are already plans to increase this number by 3,300 beds over the next five years, like the new Mount Elizabeth Novena hospital in Singapore.
There are some broad trends to support such growth for IHH. For one, healthcare spending in Asia and the Middle East is growing, as the regions’ population ages and expand. “We foresee this trend continuing into the future fuelled by growing affluence and a preference for private hospitals due to affordability and increasing private insurance coverage,” writes Tan.
Indeed, over the last three years, IHH has been growing its Ebitda at a compounded annual growth rate (CAGR) of 18%. “We foresee this trend to continue driven by increasing revenue intensity from higher value services and increasing occupancy and addition of new bed capacity which would in turn spur in-patient visitor growth,” writes Tan, who expects IHH’s Ebitda to grow at a CAGR of more than 19% over the coming four years.
IHH, according to Tan, will be able to hold its margins despite the expansion in volume, as the experienced managers can eke out operating leverage and charge higher prices. The flipside is that, costs, especially in the form of wages, will be increasing in line with the overall expansion.
To be sure, there are other healthcare providers around in this region, including Thailand’s Bumrungrad International Hospital and Bangkok Dusit Medical Services Public Company Limited. There is also Singapore’s Raffles Medical Group and India’s Fortis Healthcare. Nevertheless, from the perspective of CLSA’s Tan, IHH, given its bigger heft, wider geographical reach and growth potential, will be accorded a valuation premium over these other listed healthcare groups.
In this week’s issue 534 of The Edge Singapore, check out the interview with IHH’s CEO, Lim Cheok Peng, on more details of his expansion plans and which are the markets with the most growth potential for IHH.
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