• LYC Healthcare (LYC) has successfully transformed into a healthcare player with the segment’s revenue making up 96% of total revenue. Its primary services are in postpartum confinement, fertility treatment, and senior living care.

• Currently, it has three facilities located in TTDI, Puchong and Bukit Jalil with a total of 122 beds. This will grow by more than 50% to 189 beds upon the opening of new facility in Johor Bahru.

• Historically, it has recorded continuing losses owing to its suboptimal occupancy rate of 45-50%. Moving forward, we believe there is a positive outlook for future profitability as the facilities reach the optimal occupancy rates.

• Based on LYC's 12-month trailing EV/EBITDA ratio of 11.2x, the stock is currently trading at 14% discount to its peers’ average EV/EBITDA of 13x. However, we think this is justified by its inferior EBITDA margin and sub-optimal occupancy rate.

• Key re-rating catalyst to the stock price is higher occupancy rate leading to maiden profitability.

From IT to Healthcare Dominance

LYC, formerly known as Mexter Technology Bhd, initially established itself as an IT company. However, since 2017, the company has undergone a substantial transformation aimed at diversifying its business portfolio. This strategic shift has seen LYC venturing into the healthcare sector, particularly focusing on services related to maternal and childcare. The company's strategic pivot towards healthcare aligns with its overarching plan to concentrate and expand its presence within the sector. Concurrently, LYC has retained its IT business, albeit with a lesser focus compared to its healthcare endeavors. Segment-wise, the healthcare segment significantly dominates, contributing approximately 96% of the total revenue in FY23, while the IT segment contributes roughly 4%. LYC's venture into the healthcare sector transcends its domestic borders, as exemplified by its expansion into Singapore.

Providing Top-notch Fertility Treatment Services

LYC is diversifying its healthcare services portfolio to include premium offerings in postpartum confinement, fertility treatment, and senior living care. In addition to renowned cardiology treatments, Malaysia is also esteemed for its fertility services, attracting medical tourists mainly from Indonesia, China, Bangladesh, India, Japan, the United Kingdom, and the United States. Malaysia's affordable accommodations and diverse tourist attractions make it an appealing destination for medical tourists and their families. In terms of government aid, the government has announced under Budget 2024 the provision of tax relief of up to RM10,000 for various medical expenses, including fertility treatments. Additionally, the Employment Provident Fund (EPF) permits members facing medical issues to make partial withdrawals from Account 2 to cover approved medical expenses, including fertility treatments. Consequently, we anticipate that these governmental aids will strengthen LYC's fertility treatment segment.

Premium Offerings in Postpartum Confinement Services

LYC has garnered recognition as one of Malaysia's top confinement centers, offering personalized guidance and psychological support. Currently, in addition to LYC’s established prime locations in TTDI, Puchong, and Bukit Jalil, with facilities featuring 33, 29, and 60 bedrooms respectively, the group has expanded with a fourth center in Johor Bahru, boasting a 67-bedroom facility at M Suites Hotel. We think that the postnatal care industry is thriving, with traditional confinement nannies competing alongside 5-star postpartum centers to provide professional and luxurious care to new mothers and babies. Undoubtedly, this industry is in high demand, evident from the proliferation of confinement centers and agencies nationwide.

Despite the 27% and 16% declines in fertility rates in Malaysia and Singapore (refer Chart 1 & 2) respectively over the past decade, attributed to urbanization and rising education expenses, we opine that the prospects for the confinement center business remain promising. This is backed by the value Malaysian parents, especially those with higher incomes, place on brand reputation and their willingness to spend more on products from trusted companies. On top of that, this industry benefits not only from a growing population but also from an increasing number of women in the workforce of childbearing age.

Increasing Footprint in the Singapore Market

We also like LYC due to its ongoing expansion strategies aimed at increasing its footprint in Singapore. LYC's footprint in Singapore is primarily through its 64.5% indirectly owned subsidiary, LYC Mother & Child Centre Sdn. Bhd. (LYCMS), which wholly owns T & T Medical Group Pte. Ltd. (T&T) and HC Orthopaedic Surgery Pte. Ltd. (HCOS). Both companies have established themselves well in Singapore with strong operating and financial track records. Singapore's healthcare system is renowned, and its medical tourism industry has experienced significant growth due to increased mobility among the region's population. With Singapore facing an aging population and a growing emphasis on personal health, there is a rising demand for early diagnoses and preventive care. According to the Singapore population report for 2023, citizens aged 65 and above make up almost one-fifth of the population, up 11.7% from a decade ago, and this proportion is expected to rise further by 2030. The expansion into Singapore is aimed at enhancing the group's market presence and the marketability of its healthcare services.

In March, LYC Healthcare Bhd's subsidiary LYC Medicare Singapore Ltd lodged the preliminary offer document with the Singapore Exchange Ltd's (SGX) Catalist Board. This significant step marks a milestone in its strategic expansion and growth trajectory. The initiative to lodge the offer document for LYC Medicare Singapore aligns with the group's vision to strengthen its brand in the Southeast Asian healthcare landscape. Notably, the healthcare segment from Singapore operations contributed approximately 45.9% of LYC’s revenue in FY23. Therefore, we anticipate a positive contribution to LYC's earnings moving forward, as this will elevate LYC Healthcare's brand presence in Singapore, fostering greater awareness among local and foreign patients as well as investors in the regional countries. Additionally, this can help access to capital markets and enhance liquidity.

Financial Highlight

LYC has maintained a consistent upward trajectory in its top-line growth, achieving a notable CAGR of 64.8% over the past five years, culminating in a revenue of RM92.3mn in FY23. This positive trend is notably attributed to the increased contribution from its healthcare segment. In FY23, LYC experienced its highest revenue to date, witnessing a substantial surge to RM92.3mn from the preceding year's RM64.6mn, marking a 42.9% YoY growth. The revenue improvement in FY23 was primarily propelled by the strategic acquisitions of Tao Global Ventures Sdn. Bhd. and three dental clinics, namely KL Dental (Kiara) Sdn. Bhd. (KLDK), KL Dental Sdn. Bhd. (KLD), and KL Dental (Connaught) Sdn. Bhd. (KLDC), which were consolidated in December 2022 and November 2022 respectively. It's noteworthy that LYC recorded a revenue of RM94.97mn in the 9MFY24 as compared to RM66.6mn in 9MFY22, indicating a notable improvement, primarily stemmed from enhanced performance in the Singapore healthcare businesses and the nutraceutical sector. Contrastingly, the group recorded continuing losses over the past five years, attributed to a confluence of factors. These include substantial initial investments required for entry into the healthcare sector, and the impact of depreciation and amortization costs associated with healthcare infrastructure and acquisitions. However, LYC's LBT has significantly improved to RM2.9mn in 9MFY24 from RM6.4mn previously propelled by robust performances from both Singapore healthcare businesses and the nutraceutical sector. Moving forward, we are positive that the company will be profitable in future, particularly as the confinement centres reach optimal occupancy rates. Note that the current occupancy rate for LYC confinement centres ranges between 45% and 50%. Aside to that, the group is planning to increase its bed capacity by more than 50% from 122 to 189 beds in Johor Confinement Centre. This expansion is poised to bolster the group's earnings due to the potential for economies of scale associated with a larger bed count in a confinement center or hospital. Therefore, we believe there is a positive outlook for LYC’s future profitability.

Current Valuation: Fairly valued

The trailing 12 month EV/EBITDA multiple of LYC stands at 11.2x, which is circa 14% discount to its peers’ average EV/EBITDA of 13x (Table 1). We think this is justified considering its inferior EBITDA margin of 11.4% against peers’ average EBITDA margin of 22.2%. Hence, we discern that LYC appears fairly valued presently. Looking at LYC's closest peers namely KPJ, IHH, Optimax Holdings, and TMC Life Sciences, we observe EV/EBITDA ratios of approximately 15.2x, 13.9x, 11.8x, and 12.7x, respectively.

However, we foresee potential for further re-rating of valuations once earnings begin to materialize in the medium term. Anticipating LYC's earnings to turn positive within the medium term due to effective execution strategies and expansion efforts, we expect a broader positive trend in the healthcare industry. This is driven by factors such as the global aging population and the expansion of medical insurance, indicating sustained robust demand.

Source: BIMB Securities Research - 7 May 2024