• Healthcare sector outlook will continue to be bolstered by the resurgence in occupancy rates, patient numbers, and the increasing trend of health tourism.

• Maintain an OVERWEIGHT call on Healthcare sector with a BUY call on IHH (BUY, TP: RM7.17), and KPJ (BUY, TP: RM1.88).

Hospital players remain thriving

The recently concluded corporate earnings season presented a mixed picture for healthcare players. Among the companies under our coverage, one exceeded our expectations in terms of earnings, one met our expectations, while two fell below. Overall, hospital players saw higher YoY top-line results, propelled by enhancements in hospital activities and heightened demand. In the case of IHH, although the company achieved higher revenue, fuelled by increased patient volume both locally and globally, earnings were dampened by higher-than-expected depreciation and amortization expenses. Conversely, pharmaceutical and nutraceutical players experienced restrained earnings growth due to ongoing rises in operating expenses stemming from increased raw material costs and global inflationary pressures.

Sector prospects remain intact

In FY24, we expect both hospital operators to maintain an earnings growth ranging from approximately 15-22% YoY. This growth will be driven by a blend of organic expansion within existing hospitals and the incorporation of newly commissioned facilities. It's worth noting that KPJ has indicated that DSH2 is projected to achieve EBITDA positivity by the end of 2024, supported by an expansion to 120 beds from the current 90 beds. Additionally, KPJ Dato’ Onn in Batu Pahat and Perlis are progressing towards delivering their maiden profits. On the other hand, IHH plans to expand its operations significantly, aiming to add close to 4,000 organic new beds by 2028 across various regions (Malaysia: +1,300 beds, India: +1.860 beds, Europe: +310 beds, Hong Kong: +170 beds, Turkiye: +120 beds). Aside to that, we anticipate an increase in collaborations between the public and private sectors in response to growing demand. As of 1st March 2024, the average nationwide bed occupancy ratio in government hospitals stands at approximately 97.6%. However, note that the Health Ministry has indicated that making collaboration mandatory for the private sector is not currently necessary. As for pharmaceutical and nutraceutical players, namely Apex Healthcare and Nova Wellness, we anticipate subdued earnings in the near term. This is attributed to the continuous rise in input costs worldwide, such as raw materials, labor, and energy, leading to an increase in prices for pharmaceutical drugs and essential goods. With pharmaceutical drug prices on the rise in the United States, a similar trend may soon manifest in Malaysia.

Overweight on the Sector

We maintain an OVERWEIGHT call on the Healthcare Sector with a BUY call on IHH (BUY, RM7.17) and KPJ (BUY, RM1.88) supported by increasing demand for elective surgeries, a resurgence in occupancy rates and patient numbers and a growing trend in health tourism.

Source: BIMB Securities Research - 7 Mar 2024