Kenanga Research reiterated OVERWEIGHT call for the healthcare sector as the demand for private healthcare will continue to gain traction next year (CY24), underpinned by growing patient throughput and higher yields from a case-mix with more acute cases.
“Also helping will be better operational efficiency, cost optimisation and overhead absorption thanks to a gradual ramp up of new beds. Similarly, we see robust sales of pharmaceuticals and over-the-counter (OTC) drugs backed by increased health awareness.
“Over the longer term, the prospects of private healthcare will continue to be underpinned by rising affluence and an aging population,” it said in its Sector Update today (Dec 28).
Elaborating further, Kenanga said global healthcare expenditures are projected to reach a total of USD10 trillion by 2026, increasing from USD8.4 trillion in 2022, representing a (compound annual growth rate) CAGR of 3.5% during the five-year period.
“Amplifying the demand for private healthcare are surging chronic diseases across the globe. World Health Organisation (WHO) had reported that almost half of the global healthcare expenditures (USD4 trillion) will be spent on three leading causes of death, namely cardiovascular diseases, cancer, and respiratory diseases,” it said.
The research house projected that IHH Healthcare Berhad’s patient throughput growth and revenue intensity to drive 2024 earnings, propelled by more acute cases including elective surgeries.
“In 2024, we project IHH’s revenue per inpatient growth of 12% to 16% compared to an estimated growth of 19% in 2023 due to low base effect in 2022; inpatient throughput growth of 9% to 12% versus an estimated growth of 7% in 2023; and bed occupancy rate (BOR) of 65% to 73% versus an estimated BOR of 65% in 2023 for its hospitals in Malaysia, Singapore, India and Türkiye.
“We believe the key growth factor for its inpatient throughput and BOR would be revenue intensity from a case-mix with more acute cases and medical tourists as well as the addition of new beds.
“We expect sustained performance in Malaysia, while staff shortages in Singapore have been resolved. There is also a return of Middle Eastern and Central Asian medical tourists to its hospitals in Türkiye and India,” Kenanga added.
As for KPJ Healthcare Bhd, the research house anticipated that KPJ’s patient throughput to grow at 8% compared to an estimated 6% in FY23 with BOR at 71% compared to an estimated 68% in 2023 driven by revenue intensity emanating from the recovery in demand for elective surgeries.
“Thanks to high patient throughput, two of its new hospitals have turned EBITDA-positive while the other two only recorded small operating
losses.
“We expect KPJ’s earnings to gain momentum moving into FY24 on better operational efficiencies from its cost optimisation effort and overhead absorption rate due to gradual ramp-up in new beds opening, an increase of 9%, which we have factored into our forecast.”
On health supplements and OTC drugs, Kenanga said The Statista Consumer Market Outlook projects the OTC pharmaceuticals market in Malaysia to grow at a CAGR of 6% to an estimated USD715 million (RM3.2 billion) by 2027, as consumers are more proactive of personal health post Covid-19.
The trend augurs well for Kotra Pharma (M) Sdn Bhd (KOTRA) (OP; TP: RM6.03), which manufactures and sells OTC supplements, nutritional and pharmaceutical products under brands such as Appeton and Axcel, it said.
Meanwhile, the research house said for Nova Wellness Group Bhd (NOVA) it expected the FY24F sales volume of NOVA (OP; TP: RM0.84) to rise by 15%, fuelled by gradual ramp-up of its new plant and the full-year impact from 35 new SKUs introduced in FY22,
It is also backed by its widening distribution network as well as penetration into local public hospitals.
However, Kenanga said the same cannot be said for Pharmaniaga Bhd (UP; TP: RM0.31) which is still under the PN17 status.
“Pharmaniaga guided for no further provisions going forward. However, it still holds some unsold vaccines (which have already been fully provided for) and has managed to sell some of them.
“To exit the PN17 status, Pharmaniaga has proposed a capital reduction of RM180 million issued share capital, a 4-for-5 rights issue of its 1.18 billion new shares with 1.18 billion free warrants and a private placement of its 714 million new shares or 26.9% of the enlarged issued share capital after the proposed rights issue.
“The exercise will result in massive earnings per share (EPS) dilution due to the tripling of its share base. We project pedestrian earnings in FY24 at level similar to pre-Covid, averaging RM40 million to RM60 million, driven by regular orders for medical supplies from Health Ministry’s concession.”
It added: “We remains cautious on Pharmaniaga due to the negative shareholders’ equity of RM264 million as at 30 September 2023 impeding its ability to give out dividends and (the possibility of the) government seeking for better value-for-money contracts.”
Kenanga’s sector top picks are KPJ (OP; TP: RM1.56) for its pricing power as a private healthcare provider and its strong market position locally with the largest network of 28 private hospitals compared to next largest players IHH’s 16 hospital; and IHH (OP; TP: RM7.00) for its pricing power as the inelastic demand for private healthcare service allows providers such as IHH to pass on the higher cost amidst rising inflation, and presence in multiple markets such as Malaysia, Singapore, Türkiye and Greater China.
