Reiterate Overweight. In the face of sustained elevated inflation, we like private hospitals given the inelastic demand of healthcare; hence, their ability to pass higher cost through. We believe that the healthcare industry will continue to enjoy growth, supported by growing healthcare expenditure, rising medical insurance coverage, and an ageing population demographic. In terms of stock exposure, we like IHH for: (i) its pricing power, as the inelastic demand of healthcare provides it the ability to pass cost through amidst rising inflation, (ii) strong pent-up demand from domestic and international patients of which the group have started seeing from end-Mar 2022, and (iii) commanding material market position in countries it operates in. KPJ suffered from lack of re-rating catalysts while its new hospitals under gestation period could continue to be a drag on earnings; hence, we reiterate our Market Perform call. Our calls are as follows: IHH (OP; TP: RM7.20), KPJ (MP; TP: RM0.87) and Pharmaniaga (MP; TP: RM0.64).

IHH taking inflation in its stride. Given the low “price elasticity of demand” of private healthcare services, IHH has been able to pass on cost inflation to customers, as reflected in its rising revenue per inpatient over the past several quarters. We highlight that its list prices have been adjusted for inflation in 1QFY22. There have been strong returns of domestic patients as well as growth in foreign patients in Malaysia and Singapore. Specifically, the group in April 2022 saw a strong return of local and foreign patients. In Turkey (80% bed occupancy rate) and Europe, IHH foresees the high bed occupancy rates to continue. While in India, it expect gradual improvement of non-Covid patients starting from 2QFY22 since 1QFY22 saw depression in low elective surgeries due to the omicron wave. IHH’s investment appeal lies in: (i) its pricing power, as the inelastic demand of healthcare needs provides it with the ability to pass cost through amidst rising inflation, (ii) strong pent-up demand from domestic and international patients of which the group have started seeing from end-Mar 2022, and (iii) commanding market position in countries it operates in.

Pedestrian earnings growth for Pharmaniaga. Despite recording bumper profits in FY21, we do not expect FY22 to chalk up positive net profit growth since most of the vaccines delivery has been completed. Leveraging on the experience and expertise in manufacturing fill and finish of the Sinovac COVID-19 vaccine, the Group intends to export the vaccine to countries such as Indonesia, Philippines, Cambodia, Thailand and several African nations that are facing vaccine supply shortages. Pharmaniaga is actively negotiating with Sinovac Biotech Ltd to secure a deal to allow the Group to speed up the supply of vaccines to these countries. The Group is in the midst of finalising the logistics and distribution contract extension agreement with the Ministry of Health Malaysia, slated to be completed by 3Q 2022. Going forward, the Group is strengthening its business footprint in Indonesia as it has huge untapped potential. In Indonesia, the division has successfully staged a swift turnaround, highlighting the effectiveness of the reorganisation of the Indonesian business to enhance its operational efficiency through an ongoing stock optimisation exercise and aggressive payment collection. No change to our FY22E/FY23E earnings forecasts. Our TP is RM0.64 based on 11x FY23E EPS (previously 12x), at a 25% discount to peers’ average of 14x due to its smaller market capitalisation. The saving grace is a 6% dividend yield.

KPJ lacking re-rating catalysts, Reiterate MP. KPJ suffered from lack of re-rating catalyst while its new hospitals under gestation period could continue to be a drag on earnings. The Group will continue to take advantage of government’s incentives in order to mitigate the adverse effects of the pandemic. However, its new hospitals such as KPJ Bandar Dato’ Onn, KPJ Batu Pahat, KPJ Perlis and KPJ Miri which are currently under gestation period could continue to drag overall earnings. Although we like KPJ for the following reasons:- (i) inelastic demand of healthcare needs hence ability to pass cost through amidst rising inflation, and (ii) having the largest hospitals network locally, catalysts are lacking despite its share price falling to seemingly attractive levels at mean PER. No change to our FY22E/FY23E earnings forecasts. Our TP is RM0.87 based on 25x FY23E EPS, at a 20% discount to regional peers’ average due to its smaller market capitalisation.

Source: Kenanga Research - 8 Jul 2022