• Overall, the recently concluded 2Q23 corporate earnings season can be deemed favorable.

• Healthcare sector outlook will remain supported by a growing demand for elective surgeries, the rebound in occupancy rates and patient numbers as we transition to an endemic phase

• Maintain an OVERWEIGHT call on Healthcare sector with a BUY call on IHH (BUY, TP: RM7.19), and KPJ (BUY, TP: RM1.43).

Rising healthcare needs

The recently concluded corporate earnings season was favourable for healthcare companies, as two companies' earnings under our coverage met our expectations, while only one company performed below our expectations. Top-line and bottomline results were generally higher YoY driven by improvements in hospital activities and increased demand for pharmaceutical products. In the case of IHH, despite attaining higher revenue (backed by increased patient volume both locally and globally), the company experienced lower earnings due to elevated operational costs.

Sector prospects remain intact

In FY23, we anticipate that both hospital operators will sustain a revenue expansion of approximately 6-11% YoY. This growth will be fuelled by a combination of organic development within existing hospitals and the addition of newly commissioned facilities. Despite facing escalating cost pressures from the unpredictable currency market and the inflationary impact on medical consumables, we believe that these hospital operators will manage to uphold their margins through two main strategy namely: (i) various forms of cost control, and (ii) enhancing the mix of complex cases they handle. We also anticipate more collaborations between the public and private sectors in the industry, driven by the growing demand. At present, the average nationwide bed occupancy ratio in government hospitals is approximately 72.6%. The Ministry of Health (MoH) is presently focusing on enhancing public hospitals’ facilities with better equipment. This has indirectly resulted in the private sector shouldering a greater responsibility for delivering primary healthcare services. This transition aims to alleviate pressure on the public sector, enabling it to concentrate more on providing care to economically disadvantaged patients. Aside to that, we anticipate improved earnings from the pharmaceutical player, namely Apex Healthcare, driven by resilient demand for pharmaceutical products, although margins may be restrained due to higher raw material costs.

Overweight on the Sector

We maintain an OVERWEIGHT call on the Healthcare Sector with a BUY call on IHH (BUY, RM7.19) and KPJ (BUY, RM1.43) underpinned by several factors namely: (i) a growing demand for elective surgeries, (ii) the rebound in occupancy rates and patient numbers as we transition to an endemic phase, (iii) an increase in health insurance ownership, and (iv) a rising trend in health tourism. It is worth to note that potential downside risks to our sector assessment includes: (i) potential currency volatility impacting medical tourism, and (ii) the continued scarcity of nurses.

Source: BIMB Securities Research - 4 Sept 2023