Reiterate OVERWEIGHT. There was a slight sequential deterioration in the recently concluded 4QCY22 results season against our expectation. Out of the five companies under our coverage, two beat our forecasts (KPJ and KOTRA) and three disappointed (IHH, NOVA and MGRC). We anticipate earnings resilience in 2023 for all three areas of healthcare under our coverage, namely (i) private hospitals driven by the return of elective surgeries, (ii) pharmaceuticals and over-the-counter (OTC) drugs on the rising health consciousness trend, and (iii) immunotherapy due to increasing adoption as a type of cancer treatment. Over the longer term, the growth prospects of the healthcare sector will continue to be underpinned by an aging population, rising affluence and growing chronic diseases across the globe such as cardiovascular diseases, cancer and respiratory diseases. Our top picks for the sector are KPJ (OP; TP: RM1.50) and KOTRA (OP; TP: RM7.00).

A mixed bag of results. There was a slight sequential deterioration seen in the recently concluded 4QCY22 results season with 40%/60% of results coming above/below our forecasts vs. 25%/50%/25% of above/within/below in the preceding quarter (see table on Page 2). Out of the five companies under our coverage, two beat our forecasts (KPJ and KOTRA) and three disappointed (IHH, NOVA and MGRC).

Private Hospitals

FY22 strong operating statistics usher in FY23. KPJ’s FY22 results beat expectations thanks to higher patient throughput (+10%) and higher BOR of 58% against 43% in FY21 as surgeries volume rose 12%. Better overhead absorption (on an improved turnover) drove a 34% improvement in EBITDA boosted by narrowing losses from its new hospitals. Despite missing expectations due to weaker-than-expected showing from its Singapore and Turkey operations, IHH’s operating statistics are pointing towards a solid FY23. Case in point, IHH’s FY22 inpatient admission was higher in Malaysia (+35%), Acibadem (+7%) and India (+4%) though lower in Singapore (-4%). Revenue per inpatient rose in Singapore (+26%), Acibadem (+31%) and India (+3%) but lower in Malaysia (-7%). All in, both IHH and KPJ’s solid operating statistics in FY22 are pointing towards a good showing in FY23.

Outlook. Global healthcare expenditures are projected to reach a total of USD10t by 2026, increasing from USD8.4t in 2022, representing a CAGR of 3.5% during the five-year period (see chart on next page). Amplifying the demand for private healthcare are rising chronic diseases across the globe. Specifically, WHO reported that almost half of the global healthcare expenditures (USD4t) will be spent on three leading causes of death: (i) cardiovascular diseases, (ii) cancer, and (iii) respiratory diseases.

We project IHH’s patient throughput growth and revenue intensity to drive 2023 earnings as demand for non-Covid related services including elective surgeries recovers.

In 2023, we expect IHH’s revenue per inpatient growth of 10%-15% (vs. 18% in 2022 due to low base effect in 2021), inpatient throughput growth of 10%-15% (vs. 10% in 2022) and bed occupancy rate (BOR) of 60%-73% (vs. 56%-70%% in 2022) for its hospitals in Malaysia, Singapore, India and Turkey. We believe the key growth for its inpatient throughput and BOR will be the return of elective surgeries and medical travel, the addition of new beds (constrained previously by staff shortages) and the first full-year contribution from the Acibadem Ataşehir hospital.

We also like IHH (OP; TP: RM7.00) for its pricing power as the inelastic demand for private healthcare service allows providers such as IHH to pass on the higher cost amidst rising inflation, and its presence in multiple markets, i.e. Malaysia, Singapore, Turkey and Greater China.

Similarly, in 2023, we expect KPJ’s (OP; TP: RM1.50) patient throughput to grow 14% (vs. 12% in FY22) while its BOR at 66% (vs. 58% in 2022) will be driven by recovery in demand for its services, particularly, non-Covid-related ones including elective surgeries.

Similarly, we like KPJ for its pricing power as a private healthcare provider and its strong market position locally with the largest network of 28 private hospitals (vs. 16 of the next largest player IHH).

Health Supplements and OTC Drugs

A mixed bag of results, but earnings remains resilient. KOTRA’s 1HFY23 results beat expectations due to higher-than-expected volume sales as consumers took precautionary steps amidst rising cases of the common flu and influenza-like illnesses by stocking up health supplements. However, NOVA’s 1HFY23 results missed our expectation due to lower-than-expected sales volume from slower-than-expected commercial operation of its new plant.

Outlook. Independent market researcher The Statista Consumer Market Outlook projects the OTC pharmaceuticals market in Malaysia to grow at a CAGR of 6% to an estimated USD715m (RM3.2b) by 2027 as consumers take a more proactive stance towards their health and well-being (including taking health supplements on a regularly basis), especially in the aftermath of the Covid-19 pandemic.

The trend augurs well for KOTRA (OP; TP: RM7.00) which manufactures and sells OTC supplements and nutritional and pharmaceutical products under key flagship household brands such as Appeton, Axcel and Vaxcel. We also like KOTRA for: (i) its integrated business model encompassing the entire spectrum of the pharmaceutical value chain from R&D, product conceptualisation to manufacturing and sales, and (ii) the superior margins of its original brand manufacturing (OBM) business model (vs. low-margin contract manufacturing).

Meanwhile, backed by a new plant, widening distribution network and penetration into local public hospitals, we expect NOVA’s (OP; TP: RM1.00) FY23 volume to rise by 10% fuelled by gradual ramp-up of its new plant and the full-year impact from 35 new SKUs introduced in FY22. We like also NOVA for its business model which encompasses the entire spectrum of value chain from product conceptualisation starting from R&D to manufacturing.

Immunotherapy

MGRC’s 1HFY23 results missed our expectation, registering a net loss of RM0.4m against our full-year net profit forecast of RM6.2m. The variance came largely from higher-than-expected start-up costs and slower-than expected ramp-up of its new range of biopharmaceutical products.

Outlook. According to Immunotherapy Drugs Market by Type, Therapy Area, End User - Global Forecast to 2025, an India-based market research firm projects the size of the global immunotherapy market is projected to grow to USD275b by 2025 from USD163b in 2020, translating to a CAGR of 11%, driven largely by the rising adoption of immunotherapy in the treatment of diseases especially cancer, as well as post conventional treatments. Meanwhile, according to Verified Market Research, within the segment of cancer immunotherapy alone, the global CAR T-cell therapy market is expected to grow at a CAGR of 63.8% to USD51b by 2028 from USD590m in 2020.

Earnings growth of MGRC (OP; TP: RM0.95) will gather momentum in 2H 2023, driven by maiden contributions from Thailand and the Middle East as it ramps up its distribution network and footprint overseas for its biopharmaceutical products. Already, the group had, in its 1QFY23 (Jul-Sep), registered maiden contributions from Thailand and the Middle East and expect orders to continue in coming quarters. We like MGRC for its exclusive rights to deliver such immunotherapy treatment in the region under a long-term licensing agreement with reputable principals. In addition, it is also the leading provider of genetic sequencing and analysis in Southeast Asia.

Source: Kenanga Research - 8 Mar 2023