Investment Highlights

• We reiterate our OVERWEIGHT call on the private healthcare sector. Long-term prospects for the sector are positive underpinned by an aging population, rising affluence and increasing life expectancy. The local private healthcare sector has an added catalyst, i.e. medical tourism backed by highly competitive charges, efficient hospitalisation costs (vs. those in developed countries), a generally English-speaking population and various incentives provided by the government.
• However, we anticipate overall earnings performance for private healthcare in 2020E to be poor due to the Covid-19 pandemic. We believe that inpatient volume will begin recovering in 2H2020 as the MCO eases although we believe that a portion of the patients will continue to defer non-essential cases for as long as possible. The private hospitals will also suffer from the drop in medical tourists and strict border controls. The sales mix share of medical tourists was around 3% for KPJ and 15% for IHH (6% in Malaysia, 26% in Singapore, 16% in Turkey and 10% in India) in 2019.
• Our house projection for the USD/MYR rate for 2021 is RM4.25. Private healthcare operators in Malaysia may be negatively impacted by the weakening MYR vs. the USD as costs of key inputs such as drugs, medical supplies and medical equipment are denominated in USD.
• We may downgrade our OVERWEIGHT call to NEUTRAL should there be: (1) a prolonged pandemic beyond 2H2021; (2) higher-than-expected start-up losses at new hospital; and (3) significant dropout of patients from private hospitals due to economic reasons.
• We think the net profit margins for private hospitals may decline due to lower inpatient volume, which typically commands a higher yield. Also, although private hospitals offer Covid-19 test kits, these are low-profit margin services.

• We maintain our BUY call on KPJ Healthcare with an unchanged FV of RM1.02/share. Our valuation is based on a PE of 23x FY21F EPS. We anticipate KPJ’s FY20E earnings to tumble 15% before rebounding by 14% in FY21F. We think that net profit margin will slip by 1.1ppt to 4.8% in FY20E before recovering to 5.0% in FY21F. Risk to earnings is the group may be affected by gestational costs from new hospitals although some of the expansion plans have been delayed. We like KPJ for: (1) its bright prospects in the private healthcare sector; (2) a vast network of hospitals in Malaysia; and (3) positive earnings growth led by capacity expansions.

• We maintain our BUY recommendation for IHH Healthcare (BUY, FV: RM6.58). Our fair value is based on DCF with a WACC of 7.0%. We anticipate IHH’s earnings to slip 13% in FY20E before climbing by 45% in FY21F. We like IHH for: (1) its strong prospects in the private healthcare sector backed by rising affluence and the aging population; and (2) its position in the premium segment of the private healthcare sector, translating to high EBITDA margins of over 20%. However, we are wary of the geopolitical risks from its Turkish and China operations due to the volatile currency and political climate

Source: AmInvest Research - 9 Jul 2020