We believe the healthcare industry in Malaysia is expected  to continue to see stable growth supported by the growing healthcare expenditure, rising medical insurance and aging population demographic. The healthcare services sector earnings are considered defensive considering its high predictability and captive earnings streams. The recently-concluded 1QCY13 results saw IHH Healthcare coming in within our expectations but KPJ Healthcare’s results came in below our estimates. Healthcare stocks including IHH Healthcare (MP, TP: RM4.04) and KPJ Healthcare (UP, TP: RM6.02) are trading at rich valuations and offering low dividend yields at their current market price. 

IHH Healthcare.  IHH recorded 1QCY13 results which came in marginally within expectations. The key highlights from its 1QCY13 results included: 1) Mount Elizabeth Noveena’s EBITDA loss narrowing to RM3m compared to RM16.4m in 4QFY12 and 2) the net gearing as at 31 March 2013 rising to 11% from 5% following the consolidation of 35.8%-owned ParkwayLife REIT. Moving into 3QCY13, IHH’s venture into overseas markets is expected to continue with the opening of its 320-bed City International Hospital in Vietnam following its maiden foray into Hong Kong.  

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-33.8x FY13-14 EPS compared to  its 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, on the other hand, 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 are 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. We have initiated coverage on KPJ Healthcare in the previous quarter. Following its weak 1QCY13 results which came in below expectations due to higher-than-expected losses incurred in its newly opened hospitals, we have downgraded our call on the stock to an UNDERPERFORM. The opening of new hospitals is expected to be a drag to its earnings as they require a gestation period of three to five years to turn profitable. However, we are positive on KPJ’s long  term prospect, asset-light business model and defensive earnings. That said, the stock’s growth trajectory is already reflected in its financials. Based on our forecasts, the stock is now trading at 28x FY13 and 25x FY14 FD EPS numbers, which appear rich as compared to its average net profit growth of 10% p.a. over FY13 and FY14. The stock is now trading above the historical average PER band by >+1 SD above the mean. The valuations are already rich here considering that its profit growth rates will be at the average low teens 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 expansions 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, which has one of its key focus 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