There was a slight sequential improvement in earnings delivery by the sector in the recently concluded 1QCY23 reporting season, underpinned generally by improved patient throughput, inpatient admissions, yields and sales of health supplements. We see earnings catalysts from 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. Reiterate OVERWEIGHT. Our top picks for the sector are KPJ (OP; TP: RM1.50) and KOTRA (OP; TP: RM7.00).

Generally healthy. There was a slight sequential improvement in earnings delivery by the sector in the recently concluded 1QCY23 reporting season with 40%/20%/40% coming in above/within/below our forecasts vs. 40%/60% coming in above/below in the preceding quarter (see table on Page 2). Out of the five companies under our coverage, two beat our forecasts, i.e. KPJ (OP; TP: RM1.50) and KOTRA (OP; TP: RM7.00), two disappointed, i.e. NOVA (OP; TP: RM0.96) and MGRC (OP; TP: RM0.80) and one came in within, i.e. IHH (OP; TP: RM7.00).

Private Hospitals

Strong operating statistics underpin a good start to FY23. KPJ’s 1QFY23 results beat expectations thanks to higher patient throughput (+39%) and higher bed occupancy rate (BOR) of 70% against 58% in 1QFY22 as surgeries volume rose 23%. Better overhead absorption (on an improved turnover) drove a 26% improvement in EBITDA boosted by narrowing losses from its new hospitals. Despite weaker showing from its Singapore and Turkey operations, IHH’s operating statistics are pointing towards a solid FY23. A case in point in IHH’s 1QFY23 inpatient admissions, which were higher in Malaysia (+41%), Acibadem (+14%) and India (+8%) though lower in Singapore (-2%). Revenue per inpatient rose in Singapore (+12%), Acibadem (+44%) and India (+15%) but marginally lower in Malaysia (-1%). All in, both IHH and KPJ’s earnings undertone is pointing towards a strong showing in FY23, underpinned by solid operating statistics.

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, the 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 like IHH for its pricing power as the inelastic demand for private healthcare services 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 patient throughput to grow 14% (vs. 12% in FY22) while its BOR at 70% (vs. 58% in 2022) will be driven by the recovery in demand for its services, particularly, non-Covid related ones including elective surgeries.

We also 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 remain resilient. KOTRA’s 9MFY23 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 9MFY23 results missed our expectation due to lower-than expected sales volume from slower-than-expected commercial operation of its new plant and higher-than-expected start-up costs.

Outlook. Independent market researcher Statista in its 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 regular basis), especially in the aftermath of the Covid-19 pandemic.

The trend augurs well for KOTRA 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 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 9MFY23 results missed our expectation, registering a net loss of RM3.2m against our full-year net profit forecast. 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, a study by an India-based market research firm, 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 is expected to gather momentum in the coming quarters driven by its biopharmaceutical products as it ramps up its distribution network and footprint overseas. Already, the group has, in its 1QFY23 (Jul-Sep), registered maiden contributions from Thailand and the Middle East and is expecting orders to continue in the 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 - 9 Jun 2023