IHH Healthcare Berhad (KLSE: 5225) is incorporated on May 2010 and is listed in the Main Board of Bursa Malaysia on July 2012. The Company is also listed in Singapore Stock Exchange during mid of year 2012 with the stock code SGX: Q0F.
IHH Healthcare Berhad (“IHH”) is a private healthcare provider and is engaged in integrated healthcare business and related services in various countries such as Malaysia, Singapore, India, Turkey and most recently in Hong Kong.
In Malaysia, IHH own 100% stakes of Pantai Hospital Group and Gleneagles Hospital. These hospitals are accredited by the Malaysian Society for Quality in Health (“MSQH”). The list below shows all the hospitals wholly owned by IHH in Malaysia.
Aside from the provision of hospital services, IHH also owns two (2) of the well-known Healthcare Education Centre namely International Medical University (“IMU”) and International Medical College (“IMC”).
What intrigued me to study this company is their rapid growth of their share price rising rapidly ever since their IPO on year 2012. Since year 2012, IHH share price has been on an increasing trend. If you invested in IHH since its IPO, you would have gained 88.4% in capital appreciation.
So, what causes IHH share price to increase steadily? Here are the 5 key insights about IHH that you should know before investing.
#1: Recurring Business Model
We all know that healthcare sector is very stable. There will always be demand where people need medical treatments and this makes IHH’s business model recurring in nature. The Company provides a range of medical treatments from basic healthcare services to sophisticated healthcare services such as major surgeries which requires advanced equipment and expertise. The more sophisticated healthcare services, the higher the fees charged by IHH’s hospitals.
The recurring business model also explains why the company’s revenue has been increasing consistently at a CAGR of 13.3% since year 2013.
#2: Strong Global Presence
IHH not only have hospitals in Malaysia, the company also owns hospitals that operates in other countries such as Singapore, India, Turkey, etc. The chart below shows the number of medical services (i.e. hospitals, medical centres & clinics) that is owned by the company across several countries.While IHH owns many medical services across several countries, its largest revenue contributor comes from only three (3) countries namely Malaysia, Singapore and Turkey. Over the past 5 years, revenue from these 3 countries have been consistently increasing.Moving forward, we will see further growth coming from these 3 countries. This brings me to my next point on the company’s growth plans.
#3: Acquisition of Fortis Healthcare Ltd (“Fortis”)
On 13 July 2018, IHH announced that it would acquire 31.1% stake in India’s Fortis Healthcare Ltd for RM2.348 mil. The acquisition will also trigger a mandatory cash open offer to acquire 26% equity interest in Fortis Malar Hospital Ltd (“Malar”) for total consideration of RM64 mil. This means that the company will have a controlling stake in Fortis by 57.1%.
Fortis is a chain of about 30 specialist hospitals in India. As such, the acquisition will increase the number of hospital owned by IHH from 49 to 83. Thus, making India their fourth largest market after Malaysia, Singapore and Turkey.
The below diagram shows India’s Corporate Hospital market share by revenue as at year 2017.
The acquisition of Fortis will definitely increase IHH’s market share to 21% making it the largest in India. While the acquisition seems beneficial to IHH, the acquisition price does not seem to be beneficial. The offer price of both Fortis and Malar were at 19.5% and 13% premium to both their closing share price as at 12 July 2018 respectively.
In addition, Fortis is going through a recovery period due to their cash strapped position. This means large amount of cash are needed for resuming normal operations, rentals and payment of wages. Any acquisition at wrong pricing could destroy value.
#4: Declining Profit Margin
While IHH were able to generate consistent increasing revenue, its profit margin is rather mediocre. For the past 5 years, IHH’s Gross Profit (“GP”) Margin has been consistently above 20%. However, the recent decline in GP margin was mainly due to high staff cost and inventories incurred. The higher costs incurred also translated into lower Net Profit (“NP”) Margin which saw a decreasing trend over the past 5 years from 10.86% to 7.44%. This is definitely an area of concern if the trend continues.
#5: Consistent Dividend Payment
Because of the high stability of IHH business, the Company has been consistently paying out dividend payment for the past 5 years. However, the Company’s dividend payment has always maintained at RM0.03 per share since year 2015. This is because IHH currently still on their business expansion ranging from expanding Gleneagles Hospital in KL, Malaysia and coupled with the opening of new hospital in both Turkey and Hong Kong.
The rise of IHH is definitely eye catching with fierce competition of healthcare provider industry, however any great rise of a company always accompanied by various risks.
One of the risks would be competition from other private healthcare provider in the market as they provide similar services and definitely wanted to conquer a high market share in this industry. Furthermore, the current government hospital provides a cheaper alternative to consumers.
A general risk shadowing this industry would be the improvement of healthcare treatment such as vaccination of cancer which would only meant that existing known treatment for cancer would eventually turn obsolete and the whole pipeline treatment will be remove.
At the time of writing, IHH trades at PE of 88.79 times while its peers; KPJ Healthcare Berhad (KLSE: 5878) trades at PE of 26.75 times.
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