Going Into 2H21, Short-term Headwinds From Lingering Covid-19 Cases in Malaysia Is Expected to Impact Nearly All Economic Sectors. However, These Factors Are Counteracted by Various Specific Business Ventures in Companies in the Healthcare Sector (IHH: Geographically Diversified Hospital Operations in a Number of Countries With Improving Covid-19 Numbers, Pharmaniaga: Sinovac Vaccine Distribution, Edgenta: Facilities Management SaaS Venture). We Maintain Our NEUTRAL Stance on the Sector. Our Top Pick Is Edgenta (BUY, TP: RM2.40)

IHH geographically diversified operations is advantageous for recovery. Examining daily Covid-19 cases in IHH’s key markets, we note that in India and Turkey, cases have declined rapidly (Figure #2-9). Going into 2H21, we expect inpatient occupancy to rebound (Figure #10-13), given India and Turkey have begun relaxing lockdown measures in certain regions (India: Delhi, Mumbai and other states have begun relaxing lockdown rules in early June, Turkey have begun a gradual normalisation process since mid-May.). Given IHH’s diversified geographical revenue streams (compared to KPJ’s operations solely in Malaysia), we expect a stronger recovery in earnings in 2H21 from better in patient occupancy rates in India and Turkey compared to Malaysia. We maintain our BUY rating on IHH with TP of RM5.90. Going into 2H21, we expect KPJ’s inpatient occupancy to remain significantly below pre-pandemic levels (Figure #1) given that Malaysia’s Covid-19 cases remain elevated (Figure #6) and the final stage of Malaysia government’s reopening plan is expected to only occur in Nov/Dec-21. While lower inpatient occupancy is expected to be partially cushioned by higher average revenue per inpatient (which was +27% higher YoY in 1Q21), we reckon any meaningful recovery in earnings will likely only arrive in FY22. As such we maintain HOLD on KPJ with TP of RM1.01.

Pharmaniaga. To recap, Pharmaniaga has secured 24m doses of Sinovac vaccines (14m from their fill and finish operations and 10m finished doses) to distribute, with 12m contracted to the Ministry of Health (MoH) and another 7m doses to GLCs and state governments. We reckon that significant contribution to earnings will come from the 14m fill and finish doses, given the value added nature of the venture. While the 10m finished doses is purely trading in nature, we expect the margins to be razor-thin. Based on our back of the envelope calculations, we expect the fill and finish of 14m doses to add circa RM15.5m at the EBIT level. We expect the earnings contribution of the 14m fill and finish doses to occur mainly in 2H21 given Pharmaniaga had started distribution in 2Q21 and has a fill and finish capacity of 2m doses per month (potentially rising to 4m subject to regulation changes). Despite this, we reckon contribution from the vaccine distribution is priced in as Pharmaniaga is currently already trading at ~21x forward PE which is approximately +2SD 5 year mean. Maintain HOLD on Pharmaniaga (TP: RM1.10).

Edgenta. We expect earnings in the medium term to be driven by new contract wins in the facilities management division, particularly in Healthcare Support Services due to (i) partnership with Asma to secure jobs in Saudi Arabia (ii) cutting edge facilities management SaaS offering which not only gives Edgenta an efficiency advantage over their competitors but also the opportunity to sell the service to companies who would prefer to run facilities management in house (for example: In 1Q21, Edgenta won a contract from KLCC to design and build a command centre that allows them to track workflow and increase efficiencies.) Maintain BUY, TP: RM2.40.

Maintain NEUTRAL. Going into 2H21, short-term headwinds from lingering Covid-19 cases in Malaysia is expected to impact nearly all economic sectors. However, these factors are counteracted by various specific business ventures by healthcare companies (IHH: geographically diversified hospital operations in a number of countries with improving Covid-19 numbers, Pharmaniaga: Sinovac vaccine distribution, Edgenta: facilities management SaaS venture). Maintain NEUTRAL on sector. Our top pick is Edgenta (BUY, TP: RM2.40)

Source: Hong Leong Investment Bank Research - 8 Jul 2021