Investment Highlights

• We reiterate our NEUTRAL stance on the healthcare sector. We expect three healthcare industry megatrends to dominate the headlines in 2022. These are the Covid-19 recovery, digital healthcare and higher emphasis on ESG. Separately, the recently concluded 3Q2021 earnings were satisfactory for healthcare players. Both IHH Healthcare and Apex Healthcare reported earnings which met expectations. Overall, we maintain our NEUTRAL stance.

• Megatrend 1: Covid-19 recovery
  • Significant decline in Covid-19 new cases in Malaysia since August. In terms of infections, the latest number of new cases has declined to 4,097 as of 14 Dec. This is much lower than the peak of 24,599 cases reported on 26 Aug. The lower number of cases is mainly attributed to the decline in new cases in Selangor. Recall that on 6 Aug, Selangor’s daily new cases peaked at 8,792 but have since declined to 1,021 cases on 14 Dec.
  • Omicron is a new uncertainty… The World Health Organization (WHO) announced a new variant of concern (VOC), Omicron, on 26 Nov. This is the fifth VOC after the Alpha, Beta, Gamma and Delta variants. Omicron has several mutations that may have an impact on how it behaves in terms of transmissibility and the severity of illness it causes. According to the WHO’s weekly epidemiological update on Covid-19 on 14 Dec, the Omicron variant has been confirmed in 76 countries.
  • … but early data indicates that hospitalization across South Africa remains low. According to the WHO Regional Office for Africa statement released on 9 December, “… emerging data from South Africa indicates that Omicron may cause less severe illness. Data which looked at hospitalizations across South Africa between 14 Nov and 4 Dec found that ICU occupancy was only 6.3%, which is very low compared with the same period when the country was facing the peak linked to the Delta variant in July”. Still, more data is needed before a conclusion can be reached on the severity of illness caused by Omicron.
  • Booster may be needed to increase protection. On 8 Dec, Pfizer and BioNTech said “preliminary laboratory studies demonstrate that three doses of the Pfizer-BioNTech Covid-19 vaccine neutralize the Omicron variant”. Meanwhile, according to a Reuters report on 14 Dec, “all three US-authorized Covid-19 vaccines appear to be significantly less protective against the newly-detected Omicron variant of the coronavirus in laboratory testing, but a booster dose likely restores most of the protection”.
• Megatrend 2: Acceleration of digital healthcare adoption
  • Digitalization is key to survival. Digitalization is vital to maintain a high level of customer satisfaction while staying efficient in terms of costs. We gather that IHH Healthcare has allocated US$100mil (RM423mil) to develop its digital healthcare capabilities in the next three years. Some of the areas which are ripe for digitalization include doctor appointment and drug delivery. For Apex Healthcare, the company stated in its website that “the group will continue to invest to enhance its digital capabilities; to ensure that employees are equipped to perform effectively in the new normal and to further deepen customer relationships by improving access to the group's products”.
• Megatrend 3: ESG to gain prominence
  • Going into 2022, we believe that healthcare players will allocate more resources to improve their ESG disclosure and improve their processes by taking ESG consideration into account. This is an important move to maintain the branding of the company/product as well as to avoid negative publicity due to ESG issues. We have an overall ESG rating of 4 stars for IHH Healthcare and 3 stars for Apex Healthcare. The ESG rating is integrated into our valuation in which we accord a 3% premium to IHH Healthcare’s intrinsic value to derive our fair value. There is no discount or premium on Apex Healthcare as its 3-star rating is equivalent to an “Average” rating.
• Recap of 3Q2021 earnings
  • Both IHH Healthcare and Apex Healthcare registered 9MFY21 earnings which met expectations. IHH’s 9MFY21 core earnings accounted for 76% of our full-year earnings forecasts. However, it was higher than consensus’ estimate, making up 85% of consensus’ full-year estimates. Meanwhile, Apex Healthcare’s 9MFY21 net profit of RM38.7mil made up 77% and 71% of our and consensus full-year earnings forecasts respectively.
  • For IHH Healthcare, we believe that consensus may have underestimated Parkway Pantai Malaysia (PPM) earnings in which its EBITDA increased 8% QoQ while other markets experienced lower EBITDA QoQ. Note that PPM’s revenue per inpatient admissions’ increase of 7.2% exceeded inpatient admissions by 2% QoQ. Looking into 2022, we expect Covid-related revenue to decline as most countries that IHH is operating in have reached a high level of vaccination. This will be replaced by core hospital business which may have lower margin but more sustainable in the long run.
  • As for Apex Healthcare, the demand for its pharmaceutical products has improved from the private sector’s clinics and pharmacies. This has propelled the company’s revenue to a record high in 3QF21, exceeding the pre-pandemic level. However, its earnings did not improve in tandem to reach record high and we believe that is was due to weakness in its associate earnings. Nevertheless, things should improve from FY22 onwards.
• Top pick is Apex Healthcare. As IHH Healthcare commands the bulk of the market cap in the sector and it is still a HOLD, we remain NEUTRAL on the sector. Our top pick for the sector is Apex Healthcare as it has positioned itself well to benefit from the trends of ageing population, public health education advancement and steady healthcare expenditure increase.

Source: AmInvest Research - 16 Dec 2021