IHH: Healthcare Provider Poised for Stronger Earnings as Gestation Hospitals Mature, Target Price Raised

A leading healthcare provider is positioned for a robust earnings trajectory, buoyed by the maturation of its gestation hospitals and strategic cost management initiatives. The positive outlook has led to a maintained “BUY” rating and an increased target price, reflecting confidence in the company’s operational strength and growth prospects.

Performance Review and Key Drivers

The company is entering a significant growth phase as six of its hospitals transition from loss-making to bottom-line accretive status, with three nearing PBT breakeven. This development is expected to drive substantial earnings growth and expand internal Return on Equity (ROE), largely independent of medical tourism trends, which typically account for 5-7% of group revenue.

Management’s focus on enhancing revenue intensity through complex, high-value subspecialty cases, coupled with proactive holistic cost management, has been instrumental in this positive shift. The company’s robust margins and ROE continue to provide strong visibility on near-term earnings and margin expansion. Additionally, its secondary care hospitals are well-positioned to capture spillover from medical health insurance/takaful (MHIT) for the price-sensitive M40 segment.

Future Outlook and Target Price Adjustment

The investment bank maintains its “BUY” recommendation, raising the target price to RM3.13, representing a 12.0% upside from the previous target. This revision incorporates updated Discounted Cash Flow (DCF) assumptions and implies a 16.7x 2026F EV/EBITDA, up from 16.2x previously. A 2% ESG premium is also factored into the new target price, acknowledging the company’s strong environmental, social, and governance practices.

While the company has successfully brought its gestation hospitals to EBITDA positive status, full tax optimisation is anticipated once these facilities generate more substantial profits. Sustained revenue intensity uplift and selective bed expansions at high-occupancy hospitals are expected to uphold core earnings growth and EBITDA margin resilience.

Challenges and Risks

Despite the strong outlook, certain challenges persist. Payer-driven control restrictions are likely to continue exerting pressure on inpatient volumes. Key risks include the potential for lower-than-expected patient visit numbers, slower revenue intensity growth, and higher-than-anticipated operating costs. The company is also noted to have greater exposure to unfavorable domestic regulatory changes compared to its peers.