We believe the healthcare industry in Malaysia is expected to continue to see stable growth supported by a growing healthcare expenditure, rising medical insurance and aging population demographics. The healthcare services sector earnings are considered defensive considering their high predictability and captive earnings streams. However, healthcare stocks, including IHH Healthcare (MP, TP: RM3.51) and KPJ Healthcare (NOT RATED) are trading at rich valuations and offer low dividend yields at their current market prices.

Budget 2013 an impetus for growth in the Healthcare industry. The Government has allocated RM19.3b (+15% Y-O-Y) for healthcare management and development services in 2013. The launching of 1Malaysia clinics has received overwhelming responses and benefited local communities in reducing treatment costs and facilitating health services access to treatments. The Government will allocate RM20m for an additional 70 new 1Malaysia clinics in 2013. 1Malaysia clinics will now also provide blood test services, which include cholesterol and glucose tests as well as urine tests. In addition, RM100 million has been allocated to upgrade 350 clinics nationwide as well as to provide additional 150 dialysis machines in Government haemodialysis centres across the country.

Shortage of beds in Singapore and Malaysia a boon to healthcare players. Amplifying the demand for beds over the next few years in Singapore and Malaysia is the shortfall of beds and high occupancy rate of an average 85%. In terms of bed capacity, Singapore has a relatively low total hospital beds ratio of 2.2 per 1,000 of the population in 2010. Despite the Singapore government’s effort in increasing the bed capacity of public hospitals through expansions and new developments, its public hospitals are still unable to cater to the rising demand for hospital beds. In Malaysia, the number of beds per 1,000 of the population was 1.94 in 2010, which was lower than OECD’s average of 3.1.

IHH Healthcare. We like IHH Healthcare for its exposure to a network of healthcare jewels with commanding market positions in Singapore, Malaysia and Turkey. The stock is currently trading at 40.7x and 33.8x FY13 and FY14 EPS compared to an average net profit growth of 30% p.a. over the next two years. Despite the scarcity premium that we have attached to IHH units given its bigger market capitalisation, commanding market position and superior growth potential compared to its regional peers, IHH is, however, already currently trading close to our target price. We believe IHH’s recently announced maiden foray into Hong Kong to build, own and operate a 500-bedroom hospital is in line with its management strategy to expand its international presence apart from the three key markets that it is currently in. We believe this could have a positive impact on the group’s margins given the higher ROI expectations as compared to its hospital ventures in Malaysia and Singapore. IHH’s growth driver in the next five years will come from a pipeline of new beds to be delivered through new hospital developments and the expansion of its existing facilities. In Singapore, the first phase of Mount Elizabeth Novena Hospital comprising 150 of 333 beds (all single-bed rooms) capacity and 13 operating theatres has commenced operations in July 2012. The remainder of the second phase is projected to be operational in 2H2013. In Malaysia, PPL is currently undertaking expansion projects in four hospitals, Gleneagles Medical Centre Penang, Pantai Hospital Kuala Lumpur, Pantai Hospital Klang and Gleneagles. The three greenfield projects above will add an estimated 500 beds to its network by 2014. In Turkey, Acibadem is currently undertaking expansion projects in two hospitals, Acibadem Sistina Skopje Clinical Hospital and Acibadem Maslak Hospital. There is also another two greenfield development projects here i.e. Acibadem Ankara Hospital and Acibadem Bodrum Hospital. In total, Acibadem plans to add 726 beds by 2014.

KPJ Healthcare. While we have yet to initiate coverage on KPJ Healthcare, we are positive on the company’s long-term prospects, asset-light business model and defensive earnings. However, the stock’s growth trajectory is already reflected in its financials and more importaly its share price. Based on the consensus forecast, the stock is trading at 22.8x FY13 and 20.7x FY14 EPS, which appear fully valued compared to its average net profit growth of 11% p.a. over the next two years. Looking ahead, its earnings growth over the next two years is expected to come from the building of new hospitals as well as the expansion of its existing capacity and services. The planned capex is estimated at between RM150m and RM200m p.a. Looking ahead, its new hospital in Muar (120 beds) and another in Bandar Datuk Onn, Johor Bahru (400 beds) are targeted to be operational by 2013 and 2014 respectively. Over the longer term, KPJ plans to build a new hospital each in Perlis and Pahang (Tanjung Lumpur) as well as one hospital each in Terengganu and Melaka. Its other new and expansion of its existing hospitals include KPJ Sabah Hospital, Pasir Gudang Specialist Hospital and Maharani Specialist. Its recently acquired Bangkok hospital is expected to help to contribute to KPJ’s bottom line also, but the quantum would not be significant. Five of the seven KPJ’s new hospital developments have been named as new projects under the country’s ETP, with the key focus being on medical tourism. When completed, these five projects will collectively add 822 beds to KPJ’s existing capacity of more than 2,500 beds, and they will generate gross national income (GNI) of almost RM1.3b and more than 3,000 new jobs. They will also give KPJ the capacity to serve more international patients. Among the five, KPJ Klang Specialist Hospital in Selangor, KPJ Pasir Gudang Specialist Hospital in Johor and Sabah Medical Centre in Kota Kinabalu, Sabah, are expected to complete the first phase of their developments in 2012. KPJ Pahang Specialist Hospital already had its ground-breaking ceremony officiated on June 2011. Meanwhile, KPJ Specialist Hospital Bandar Dato’ Onn, Johor will serve as a one-stop centre featuring state-of-the-art facilities in six centres of excellence namely Heart, Geriatric, Oncology, Women and Child, Cosmetic & Reconstructive as well as Orthopedic and Related Surgery Centres. Two other hospitals which are also planned to be opened in the future are KPJ Muar Specialist Hospital in Johor and KPJ Perlis Specialist Hospital in Kangar, Perlis.

Source: Kenanga