There was a slight sequential deterioration in earnings delivery (against our expectations) by the sector in the recently-concluded 2QCY23 results. Generally, private hospitals under our coverage were hit by less patients seeking treatment during the festive month. Viewed as a blip, both IHH (OP; TP: RM7.00) and KPJ (OP; TP: RM1.50) expect patients to return in subsequent quarters. On the other hand, PHARMA (UP; TP: RM0.30) was hit by higher-than expected operating cost. Over the longer term, the growth prospects of the healthcare sector will continue to be underpinned by an aging population, rising affluence and rising cases of chronic diseases globally. Reiterate OVERWEIGHT. Our top picks for the sector are KPJ and KOTRA (OP; TP: RM7.00).

A mixed set of results, but generally healthy. There was a slight sequential deterioration in earnings delivery (against our expectations) by the sector in the recently-concluded 2QCY23 reporting season with 50%/50% coming in within/below our forecasts vs. 33%/17%/50% coming in above/within/below in the preceding quarter (see table on Page 2). Out of the six companies under our coverage, three came within our forecasts, i.e. KPJ, KOTRA and NOVA (OP; TP: RM0.96), whereas the other three disappointed, i.e. IHH, PHARMA and MGRC (OP; TP: RM0.80).

Private Hospitals

Strong operating statistics in 1HCY23, temporary slowdown in 2QCY23 due festive season. Generally, private healthcare players in 2QCY23 under our coverage including KPJ and IHH were hit by less patients seeking treatment during the festive month. Viewed as a blip, both players expect patients to return in subsequent quarters as already seen starting from July. KPJ’s 1HFY23 results came in within expectation, thanks to higher patient throughput (+25%) and higher BOR of 66% (compared to 52% in 1HFY22) as demand for non-COVID related services rebounded including elective surgeries cases (+15%) following the transition to endemic phase. However, its net profit doubled thanks to better overhead absorption (on an improved turnover) as well as reduced losses from its new hospitals (which are EBITDA positive), i.e. KPJ Bandar Dato’ Onn, KPJ Perlis and KPJ Miri. The weaker-than-expected showing from IHH in 1HFY23 was due its Singapore and Turkey operations. The Turkey operations were hit by festive holidays compounded by long weekend holidays as well as presidential election. On the other hand, Singapore operation was hit by staff shortage which is easing gradually. Overall, IHH’s operating statistics are pointing towards a solid FY23. Specifically, inpatient admissions were largely higher across the board - higher in Malaysia (+27%), Turkiye (+8%) and India (+4%) but lower in Singapore (-3%). Revenue per inpatient rose in Singapore (+13%), Turkiye (+43%), India (+15%) and Malaysia (+2%).

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) with BOR of 70% (vs. 58% in 2022) which 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

Both KOTRA and NOVA’s results met expectations, while earnings remain resilient. KOTRA’s FY23 results met expectations as consumers snapped up health supplements amidst rising cases of the common flu and influenza-like illnesses. Over the immediate term, an expanding domestic over-the-counter (OTC) market augurs well for KOTRA. NOVA’s FY23 core net profit declined by 10% - we believe, due to limited new products. This is likely to change from FY24 onwards driven by the gradual production ramp-up at its new plant, the full-year impact from 35 new SKUs and the absence of lumpy start-up cost.

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 FY24 volume to rise by 15% fuelled by gradual ramp-up of its new plant and the full-year impact from 35 new SKUs introduced in FY22. We also like NOVA for its business model which encompasses the entire spectrum of value chain from product conceptualisation starting from R&D to manufacturing.

However, the same cannot be said for PHARMA (UP; TP: RM0.30) which is still under the PN17 status. The group is confident of its future prospects amid a strategic plan to exit from the PN17 classification and is currently formulating a regularisation plan. The target is to submit a regularisation plan somewhere in 3QCY23 and complete it by 1QCY24. We project pedestrian earnings growth in FY23 at level similar to pre-COVID, averaging RM40m-RM60m, driven by regular orders for medical supplies from the Ministry of Health concession. We remain cautious on PHARMA due to: (i) the negative shareholders’ equity of RM138m as at 30 June 2023 impeding its ability to give out dividends, and (ii) the government seeking better value-for-money contracts and PHARMA might have to offer new rates that are more competitive (which we have reflected in our forecasts).

Immunotherapy

MGRC’s FY23 results missed our expectation, registering a core net loss of RM6.8m against our full-year net profit forecast. Despite disappointing FY23 results, we remain sanguine on MGRC’s earnings outlook driven by its biopharmaceutical division which is gradually ramping up its distribution network and will no longer weigh down by lumpy development and start-up costs

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 - 6 Sept 2023