We expect patients deferring treatments during MCO would slowly schedule in appointments and drive up admissions in 2H. This should further be aided with the consent given to restart healthcare tourism. We have BUY ratings on KPJ (preferred over IHH), Pharmaniaga (revival of earnings) and Edgenta (2H earnings recovery). We remain OVERWEIGHT for its defensive qualities.

Hospitals. While hospitals were operational during MCO, patients were seemingly delaying non-urgent treatments with the fear of Covid-19. This was seen in both KPJ and IHH, where utilisation rates have on average, fallen by more than 50% during MCO. We are expecting some recovery in 2H, with assumption people will be less stigmatized to be near hospitals and schedule in appointments that will recover admissions. While it is still early in the RMCO, both KPJ and IHH has seen increasing number of patients enquiring to schedule in treatments.

Healthcare Tourism. During MCO, healthcare tourism in Malaysia has come to a halt with foreign tourists being banned from entering the country (Malaysia healthcare tourism for KPJ and IHH in FY19: 5%-6% of total revenue). The recent announcement on the reopening borders for medical tourist in RMCO gives us hope for some recovery to be seen in 2H. New SOPs must be adhered with the relaxation; (i) phase 1A: only critical patients requiring intensive care in Intensive Care Unit (ICU) or High Dependency Unit (HDU) are allowed, (ii) for phase 1B, the relaxation will allow medical travellers who have critical health problems (i.e. cancer (oncology), heart (cardiology). Medical travellers will need to register with the Malaysia Healthcare Travel Council (MHTC) and undergo a Covid-19 screening test in their home country prior to arriving in Malaysia. Under the first phase, medical travellers would only be allowed to be accompanied by 1 chaperone through the entire course of treatment, while minor patients would be allowed with two caregivers. Hence, we are positive that some recovery will be witnessed on this front in 2H20.

Pharmaniaga. We expect 2Q to track behind 1Q, with lower demand as we foresee hospitals already having sufficient stocks to keep them afloat (stocked up in 1Q). Furthermore, back in Apr-May, hospitals had received large amounts of donations (PPE consumables) thus, possibly less sales were made from Pharmaniaga. On a positive note, it reported that demand enquiries are now picking up, pointing towards stronger demand in 2H. News has surfaced on the Government’s decision to not centralise and combine tender and procurement worth RM500m across the 3 ministries (health, education and defence). Should this be true, we feel this may potentially see Pharmaniaga getting a new concession to procure and distribute medicine and medical supplies to the MOH beyond 2021 (interim concession ends in Dec 2021). While there is risk that the “new concession” could be awarded to someone else, we believe that Pharmaniaga would be the top contender given (i) substantial cost already incurred (sunk) for the required infrastructure (PhIS), (ii) low margins (5 years average c.1-2% at the PBT level) serving as a natural deterrent for new entrants and (iii) strong track record of over 25 years’ experience. We maintain BUY with TP RM2.92.

Edgenta. With the easing of Covid-19 cases, we are hopeful that Edgenta’s healthcare segment would do better. As we understand, Malaysia’s MOH scope of service is comprehensive, and any increase in operating costs must be borne by the concessionaire. During the beginning of Covid-19 outbreak (1Q20), higher costs on increased maintenance and replacement work was due to higher utilization in hospitals. Moreover, for their infrastructure segment, we are confident for more work to be done in 2H, in line with the heavier traffic post MCO, hence more non critical work orders that was put on pause is able to recommence. With share price retracing 22% since its 1QFY20 results release, we think there is now sufficient buffer to upgrade our rating to BUY (from HOLD); TP unchanged at RM2.60.

Maintain OVERWEIGHT on the sector for its defensive qualities; growing healthcare expenditure, ageing population, and increased life expectancy. We like KPJ (BUY, TP: RM1.09) given its niche in domestic geographical hospital network spread that feeds patients into its urban specialist centres and in view of its lacking presence internationally thus lack off exposure to external volatility. Furthermore, we prefer KPJ vs. IHH as the former is less dependent on healthcare tourism (c.5% vs. IHH’s heavier weightage per country; Malaysia c.6%, Singapore c.25%, India c.8% and Acibadem c.16%). We are also like Pharmaniaga (BUY, TP: RM2.92) which should see revived earnings given (i) PhIS has been fully amortized last year and (ii) stronger demand from MOH stemming from Covid-19. Inking a long term concession, should the “old model” be reverted to, is another catalyst.

Source: Hong Leong Investment Bank Research - 7 Jul 2020