The March reporting season saw a pick-up in hospital activities amid inflationary pressure. Nevertheless, consumer demand appeared resilient with patient growth in quarter one 2023 despite a seasonally weaker quarter.
“The pick-up in export sales as well as robust procurement activities from the public and private sectors also benefited pharmaceutical players under our coverage, Duopharma Biotech (DBB) and Kotra Industries (KTRI),” said RHB Research (RHB) in the recent Malaysia Sector Update Report.
KPJ’s quarter one 2023 core earnings more than doubled as increased bed occupancy rate of 23 points year-on-year to 70% led to better operating efficiency, coupled with increased inpatient visits from a more complex case mix during the quarter.
IHH’s quarter one 2023 was disappointing, dragged by headwinds ranging from escalating operating costs, Singapore’s nursing staff shortage, and Turkey’s hyperinflationary environment. Revenue intensity across segments was higher year-on-year except for the Malaysia division as more elective cases were carried out.
Overall patient volume grew in the range of 9-41% year-on-year except for the Singapore division, as the nursing shortage continued to constrain bed capacity.
DBB’s quarter one 2023 earnings were above expectations, boosted by a pick-up in export sales and sustained drug procurement from the public and private sectors, offset by normalised sales from the consumer healthcare segment.
“KTRI’s quarter three financial year 2023 results were above our expectations due to sequential weakness in topline performance. Earnings were boosted by a pick-up in export sales as well as robust demand for prescriptive drugs,” said RHB.
DBB and KTRI continued to demonstrate resilient margin performance, which RHB thinks was largely associated with the drug makers’ timely average selling price adjustment coupled with the easing of logistics costs.
RHB downgraded KTRI to Sell after the March reporting season, based on its rich valuation of 12x financial year 2024 future price-to-earnings-ratio and expected slower topline growth due to sequential weakness from over-the-counter sales.
RHB maintains Overweight on the healthcare sector, underpinned by relatively inelastic demand which offers investors a defensive play amid ongoing macroeconomic challenges that could adversely affect the resilience of consumer demand going forward.
KPJ remains RHB’s sector top pick due to its organic expansionary strategy to drive patient growth, being less impacted by nursing staff shortages, and the gradual increase in health tourism.
“As we remain sanguine on healthcare service providers, we think KPJ’s greater domestic focus offers better earnings stability,” said RHB.
In the pharmaceutical sector, RHB keeps their view that the momentum of drug restocking activities, especially consumer healthcare and over-the-counter products, will normalise in the second half of 2023 as restocking activities taper off with concerns on drug shortages dissipating.
Risks identified by RHB are the higher-than-expected operating costs, lower-than-expected patient visits/revenue intensity growth and unfavourable drug pricing mechanism.
