The healthcare industry rating is maintained at overweight, premised on its defensive nature as well as benefits from the recovery in the number of local and foreign patient visits.
Meanwhile, robust drug procurement activities on the public and private sector fronts should underpin a healthy performance for certain pharmaceutical companies amid softer demand in the over-the-counter (OTC) format, said RHB Research (RHB) in the recent Malaysia Sector Update Report.
“KPJ is our sector Top Pick, as we believe that its greater domestic focus grants it greater earnings stability,” said RHB.
RHB expect KPJ’s earnings growth to be anchored by better operating efficiency, since several new hospitals are nearing the end of their gestation periods.
“Also, there is a gradual increase in contributions from the healthcare tourism (HT) segment and 3% earnings accretion to our 2023 future sector earnings, due to the proposed disposal of its loss-making Indonesia business,” said RHB.
Meanwhile, RHB is still cautiously optimistic on IHH Healthcare (IHH), even though it booked strong operating metrics, as it may face headwinds from ongoing nurse shortages, predominantly in its Singapore segment, and a hyperinflationary environment in Turkey.
Having said that, the recent normalisation of wholesale electricity prices in Turkey post normalisation of natural gas costs could offer some relief to its Turkish unit, in the second half of 2023.
2023 will likely be a muted year for the local drugmakers, given the high base of 2022. RHB does not expect to see panic purchases from consumers, as concerns over drug shortages (primarily OTC products) continue to dissipate.
Nonetheless, the normalisation of raw material prices and easing supply chain bottlenecks, which should then lead to lower freight costs, should alleviate margin pressure in 2023 which, in turn, will be offset by higher electricity tariff rates and labour costs.
Both IHH’s and KPJ’s HT segments have recovered back to pre-pandemic levels, aided by the reopening of international borders. RHB expects their revenue intensity to normalise, as patients who previously deferred their elective surgeries are expected to return for these procedures.
“KPJ is still our sector Top Pick, underpinned by its robust patient growth trajectory, being less impacted by nursing staff shortages, as well as the successful disposal of its loss-making Indonesian operation in quarter one 2023. As we remain sanguine in our outlook for the healthcare service providers, we think KPJ’s greater domestic focus also grants it greater earnings stability,” said RHB.
Key downside risks identified are the higher-than-expected operating costs, lower-than-expected patient visits/revenue intensity growth, and an unfavourable drug pricing mechanism from the Ministry of Health.
