In 2H19 don’t expect much policy differential given that MySalam and PekaB40 are undergoing its trial runs. We are positive on Pekab40’s inroads into the development of public-private-partnerships, albeit at the primary care level. We can only hope that this pilot will translate into partnerships at the tertiary level of care in future. Maintain OVERWEIGHT for the sector’s defensive qualities. We prefer Edgenta (BUY, TP RM3.58) for its cheaper valuations and superior yields vs. the listed hospitals under our coverage.

Big policy. The healthcare sector has been a relative laggard when it comes to concrete policy restructuring vs. the likes of other sectors (water and infra). The crux within the Malaysian public healthcare space remains the inability to improve upon the funding status quo for public health (fear of electoral backlash). The MySalam scheme (previously B40HPF) has manifest itself as a pilot program with the objective of setting a path toward a national health insurance platform. MOH has been silent on its continuity once the seed money is utilized.

Small policy. On a smaller scale, carved out from the 2019 budget allocation of RM100m, the Pekab40 is a proof of concept scheme targeting an initial 800,000 persons from the B40 segment aged >50 and a recipient of BSH. The scheme assists the underprivileged in terms of health screening (at participating GP’s), medical equipment, incentives to complete cancer treatments and transportation. Although miniscule in budgetary allocation, we are positive on the schemes inroads into the development of public-private-partnerships, albeit at the primary care level thus far. We can only hope that this pilot will translate into more partnerships at the tertiary level of care in future. More micro policy shifts are taking shape (i) smoking ban to be enforced at eateries starting Jan 2020 (ii) decriminalizing drug usage and treating it as a medical condition vs. a criminal act. Whilst we view these policy measures in a positive progressive light, they would have null effect on sector related stocks.

Edgenta. The recent contract award from the ministry of health Singapore cements Edgenta as a bona fide regional healthcare support services player. We expect the recent award to be a prelude of more job flows to come in FY19. We like Edgenta as the proxy to the healthcare sector for its (i) valuations (FY19 PER 16.0x vs. IHH FY19 PER 43.0x and KPJ FY19 PER 21.1x) and (ii) superior yields vs. the listed hospitals under our coverage (4.4% vs. IHH 0.6% and KPJ 2.0%) .

Pharma. We reiterate our stance on Pharmaniaga. It remains competitive for the concession model due to their (i) expertise in cold chain pharmaceutical L&D, (ii) the margins from the concession business being unattractive (c.1%-2%) to attract other distributors who enjoy greater margins from distributing to the private sector. We expect the Pharmaniaga to continue with the concession which expires (Nov 2019), and potentially renewed on an annual basis whilst the MOH trashes out new service level terms and agreements; this was also the case in the last concession cycle (signed in 2011).

Maintain OVERWEIGHT. Maintain OVERWEIGHT on the sector on for its defensive qualities as we navigate through the new age of global volatility. We like Edgenta as a proxy to the healthcare sector and we expect it to continue to grow its hospital support services portfolio moving forward. If a direct hospital exposure is a must, we prefer KPJ (BUY, TP: RM1.18) over IHH (HOLD, TP: RM6.02). We feel that the valuation gulf between KPJ and its global market exposed peers warrants a reassessment. The risk to reward has skewed more towards KPJ’s favour, in view of its lacking presence internationally and thus lack off exposure to external volatility.

Source: Hong Leong Investment Bank Research - 10 Jul 2019