Budget 2020’s Allocation for Healthcare Is RM30.6bn (+6.6% YoY). Edgenta, the Number 1 Healthcare Support Service Provider in Malaysia Would Benefit Mainly by the Expansion of Hospitals and Upgrading of Medical Equipment. With the Malaysia Year of Healthcare Travel 2020 Campaign, We Believe It Will Improve Earnings for KPJ and IHH as They Are Already Active in Medical Tourism. Maintain OVERWEIGHT for the Sector’s Defensive Qualities. We Prefer Edgenta (BUY, TP RM3.56) for Its Cheaper Valuations and Better Yields Vs. Listed Hospitals Under Our Coverage.

Higher allocation. Budget 2020’s allocation for healthcare is RM30.6bn (+6.6% YoY) which will be distributed for construction of new hospitals, upgrading and expansion of existing hospitals, upgrading of medical equipment and renovation of medical infrastructure. Edgenta should be a beneficiary of this higher allocation via more work orders for maintenance and medical equipment upgrade; it currently maintains biomedical equipment and houses all the testing equipment and loaner equipment for its 85 public hospitals & labs and over 20 private hospitals in Malaysia. Furthermore having recently secured contracts for hospital support services in Singapore (July 2019) worth RM430-540m for 3-5 years (option to extend further 2-5 years), adds to its merit. We like Edgenta as the proxy to the healthcare sector for its (i) valuations (FY20 PER 15.3x vs. IHH 39.8x and KPJ 20.0x) and (ii) superior yields vs. the listed hospitals under our coverage (4.4% vs. IHH 0.6% and KPJ 2.0%).

Malaysia Year of Healthcare Travel 2020. MyHT2020 campaign, which runs in tandem with Visit Malaysia 2020, aims to promote Malaysia’s health and wellness treatments available, while enjoying Malaysia’s tourist attractions. The Government has allocated RM25m (+25% YoY) to Malaysian Healthcare Tourism Council (MHTC) to strengthen Malaysia’s position as the preferred destination for medical tourism. In 2018, medical tourism generated RM1.5bn in revenue from 1.2m healthcare travellers. Healthcare offerings in the country over the years have been presented as a comprehensive package: world-class quality, easy accessibility and competitive affordability. Both KPJ and IHH has been benefiting from healthcare tourism (c.5%- 6% of total revenue); moving on we foresee MyHT2020 will aid in the continuous ramp up of revenue. In fact, KPJ has a network expansion plan for new hospitals in tourist areas; Melaka, Miri and Kuching. As for IHH, the Prince Court Medical Centre acquisition would aid too as it is a tourist centric hospital.

Distribution concession ends. MOH has ended Pharmaniaga’s concession to distribute drugs and medical supplies and decided to introduce a new open tender system. However this will not happen immediately, hence the MOH has extended Pharmaniaga’s services for an interim period of 25 months (ends Dec 2021) and further secured a 5 year contract to continue providing logistics and distribution services for MOH (ends Dec 2024). This verifies that Pharmaniaga is the ideal choice to continue with the concession as replacing with a newcomer cannot be immediate. It is business as usual for Pharmaniaga for the next 5 years; with its proven track record, we believe Pharmaniaga will still be the main contender in an open tender environment. Maintain HOLD call with TP RM2.08.

Maintain OVERWEIGHT on the sector for its defensive qualities; growing healthcare expenditure, ageing population, and increased life expectancy. Our top sector pick is Edgenta (BUY, TP: RM3.56). For direct hospital exposure, we prefer KPJ (BUY, TP: RM1.24) over IHH (HOLD, TP: RM5.68). We feel 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 - 8 Jan 2020