Covid-19 has become a pandemic of epic proportions with a global case count of 1,365,330 and death rate of 76,504. In Malaysia, we are faced with 3,963 confirmed cases. The recently announced “PRIHATIN stimulus” offers participating opportunities for Pharmaniaga and Edgenta. While it is also the case for KPJ and IHH, this may be insufficient to offset the decline in patients delaying non critical treatments. Maintain OVERWEIGHT for the sector’s defensive qualities. Our BUY calls include: Pharmaniaga (BUY, TP: RM2.30), Edgenta (BUY, TP: RM3.56) and KPJ (BUY, TP: RM1.27).

Global pandemic. The World Health Organisation (WHO) has declared Covid-19 as a global pandemic. As of 7 Apr, 1,365,330 cases have been reported globally with 76,504 deaths (5.6% death rate). Conditions improved in China but worsened in Europe and US. For Malaysia, MOH has announced 3,963 confirmed Covid-19 cases, with 63 deaths recorded and 1,321 cured cases so far (as of 7 Apr).

MCO. During the Movement Control Order (MCO) period, which has now been extended (18 Mar-14 Apr), hospitals, clinics, pharmacies are amongst the key essential services which are allowed to remain operational during this period. Nonetheless, we foresee short-term headwinds for some hospital players; it is understood that patients are delaying non urgent treatments (both KPJ and IHH has seen significant drop for non-emergency treatments), whilst healthcare tourism has come to a halt with foreign tourists being banned from entering the country (healthcare tourism for KPJ and IHH in FY19: 5%-6% of total revenue). Overall, we gather that utilisation rates at private hospitals have on average, fallen by more than 50% during the MCO period.

Covid-19 testing. Both KPJ and IHH have started to offer testing for Covid-19 since the beginning of March. KPJ currently has 12 hospitals that are able to do the testing (includes drive thru testing); this highlights KPJ’s better outreach toward Peninsular Malaysia and their network presence vs. the competition which are much focused on major urban areas. On the other hand, IHH which started off performing Covid-19 testing in its 5 Klang Valley hospitals has already expanded it to its hospitals outside of KL as at last week. Almost half of its hospitals are also conducting drive through swab testing. IHH also offers on demand diagnostic kits to be delivered to homes in selected cities they operate in. The pricing of the Covid-19 test is roughly RM388-RM950. There are 59 government hospitals and health clinics nationwide that are ready to conduct Covid-19 screenings. Labs to conduct Covid-19 tests have also been increased to 35 labs including 7 private sector labs and 10 diagnostic labs prepared by 2 other ministries to assist MOH.

PRIHATIN stimulus. PM Tan Sri Muhyiddin Yaasin announced the “PRIHATIN stimulus” on 27 Mar to combat the negative ramifications of Covid-19. Amongst the measures, RM1bn has been allocated for Covid-19 equipment and services, which includes services from the private hospitals. This is on top of RM600m (RM500m to deal with Covid-10, and RM100m for additional contract staff hires) allocation to MOH that was previously announced in the first Economic Stimulus.

We feel the RM1.6bn allocation would benefit Pharmaniaga, being the conduit for distribution of medicines and medical supply to government hospitals and clinics nationwide. For Pharmaniaga, while business continues as usual during the MCO period, we expect some growth in revenue due to increase in demand (5% of products supplied are Covid-19 related). Challenges for Pharmaniaga would be higher costs on related transportation to cater for urgent deliveries as we understand that they are moved by air instead the usual sea route. As we understand, the coordination and implementation of procurement, handling, warehousing and distribution of the recent contribution of RM40m from GLCs, GLICs and Disaster Response Network (DRN) for humanitarian and medical-related initiatives to battle the Covid-19 outbreak will be done through Pharmaniaga. Furthermore, Pharmaniaga is procuring c.RM45m worth of ventilators for the government. Withthe expected additional volume and the extra scope of works given to MOH, this should likely boost topline.

For the allocation for Covid-19 equipment, we feel Edgenta could potentially be involved in the procuring process, and this also presents an opportunity for their Biomedical Engineering Maintenance Service (BEMS) division to undertake its maintenance. Furthermore, since the Covid-19 outbreak, Edgenta’s scope of service with MOH has included sanitization of hospitals. Edgenta has not sat idle during this period and saw an opportunity to expand the sanitisation and disinfection treatment, under its Property & Facility Solution services to the commercial, industrial and purpose build developments. We understand that this has begun with c.3m sqft of commercial buildings.

The PRIHATIN stimulus has opened opportunity for private hospitals to assists government hospitals. This cooperation would be beneficial for both KPJ and IHH in the times of decreasing patients’ volumes due to deferment of non-urgent cases. For IHH, its Singapore, Turkey and India’s hospitals currently are treating Covid-19 patients. If Malaysia is to follow those countries’ lead, we feel both hospitals are potential participants, owing to their combined network presence of c.5,700 licensed beds accounting for 44.2% of total private hospital capacity in Malaysia. Currently, private hospitals have yet to start treating Covid-19 patients; only 37 government hospitals and a university hospital are doing so. However, we are off the opinion that due to years of under investment and lack of budget, most MOH hospitals are operating at maximum capacity and the spill over to private hospitals is more of a timing issue than a question of if. Another potential arrangement would be for the government to request for private hospitals to assist by managing non-Covid-19 patients, as well as sharing medical equipment (i.e. ventilators). This too would be beneficiary for the private hospitals. We understand both KPJ and IHH hospitals have loaned out ventilators to various government hospitals across the country. Although government hospitals can still cope, KPJ has prepared c.200 beds to accommodate non-Covid-19 patients, should the need arise as a commitment to assist the government hospitals nationwide. While the mechanisms are not clear at the moment, we understand that the government has promised to make payment for the loan equipment and the beds (if being used). Still, we reckon that this would be insufficient to offset the decline in patients that have delayed their non-urgent treatments.

Forecasts. We are keeping forecasts intact at this juncture.

Maintain OVERWEIGHT on the sector for its defensive qualities. Our BUY calls include: Pharmaniaga (BUY, TP: RM2.30), given no disruption of business operation with the 5 year concession extension granted by MOH; Edgenta (BUY, TP: RM3.56) for its defensive earnings profile and pivot towards healthcare support services regionally; and KPJ (BUY, TP: RM1.27) with its niche in domestic geographical hospital network spread that feeds patient into its urban specialist centres.

Source: Hong Leong Investment Bank Research - 8 Apr 2020