Kenanga Research has reiterated an “Overweight” call on the healthcare sector adding that it likes private hospitals given the inelastic demand of healthcare; hence, their ability to pass the higher cost through.
It said that it believes that the healthcare industry will continue to enjoy growth, supported by growing healthcare expenditure, rising medical insurance coverage, and an ageing population demographic.
In terms of stock exposure, the research house said that it likes IHH for its pricing power, as the inelastic demand of healthcare provides it the ability to pass the cost through amidst rising inflation, strong pent-up demand from domestic and international patients of which the group has started seeing from end-Mar 2022, and commanding material market position in countries it operates in adding the target price for IHH is RM7.20. It has reiterated its our market calls on IHH (OP; TP: RM7.20), KPJ (MP; TP: RM0.87) and Pharmaniaga (MP; TP: RM0.64).
On Pharmaniaga, Kenanga said that despite recording bumper profits in FY21, we do not expect FY22 to chalk up positive net profit growth since most of the vaccine’s delivery has been completed.
Going forward, Kenanga said that the Group is strengthening its business footprint in Indonesia as it has huge untapped potential. In Indonesia, the division has successfully staged a swift turnaround, highlighting the effectiveness of the reorganisation of the Indonesian business to enhance its operational efficiency through an ongoing stock optimisation exercise and aggressive payment collection.
It said that it is reiterating its market perform call on Pharmaniaga with TP is RM0.64 based on 11x FY23E EPS (previously 12x), at a 25% discount to peers’ average of 14x due to its smaller market capitalisation. The saving grace is a 6% dividend yield.
On KPJ, it said that KPJ suffered from a lack of re-rating catalyst while its new hospitals under gestation period could continue to be a drag on earnings.
It said that the Group will continue to take advantage of the government’s incentives in order to mitigate the adverse effects of the pandemic. However, its new hospitals such as KPJ Bandar Dato’ Onn, KPJ Batu Pahat, KPJ Perlis, and KPJ Miri which are currently under gestation period could continue to drag overall earnings.
It said although it likes like KPJ for the following reasons:- (i) inelastic demand of healthcare needs hence its ability to pass the cost through amidst rising inflation, and (ii) having the largest hospitals network locally, catalysts are lacking despite its share price falling to seemingly attractive levels at mean PER. No change to our FY22E/FY23E earnings forecasts. Our TP is RM0.87 based on 25x FY23E EPS, at a 20% discount to regional peers’ average due to its smaller market capitalisation.
