We reiterate our OVERWEIGHT call for the healthcare sector. We expect patient throughput and revenue intensity in private hospitals in both the domestic and international markets to end the year on a high note, driven by a seemingly higher propensity of the population to seek treatment for medical issues post the pandemic. Similarly, we see robust sales of pharmaceuticals and over-the-counter (OTC) drugs backed by increased health awareness. Meanwhile, there is growing adoption of immunotherapy as a cancer treatment method. Over the longer term, the prospects of private healthcare will continue to be underpinned by rising affluence and an aging population. Our top picks are KPJ (OP; TP: RM1.50) and KOTRA (OP; TP: RM7.00).

1. Private Hospitals

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 surging chronic diseases across the globe. Specifically, WHO had reported that almost half of the global healthcare expenditures (USD4t) will be spent on three leading causes of death, namely: (i) cardiovascular diseases, (ii) cancer, and (iii) respiratory diseases.

IHH is on track to meet our FY23F revenue per inpatient growth projection of 10%-15% (following an 18% increase in FY22) and inpatient throughput growth of 10%-15% (following a 10% rise in FY22) and bed occupancy rate (BOR) of 60%-73% (vs. 56%- 70% in FY22) for its hospitals in Malaysia, Singapore, India and Turkey. We believe the key growth factor for its inpatient throughput and BOR would be the return of elective surgeries and medical tourists, the addition of new beds (previously constrained by staff shortages) and the first full-year contribution from Acibadem Ataşehir hospital.

We also like IHH 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, KPJ is on track to meet our FY23F patient throughput growth projection of 14% (vs. 12% in FY22) and BOR of 70% (vs. 58% in 2022), driven by the recovery in demand for elective surgeries. Thanks to high patient throughput, two of its new hospitals have turned EBITDA-positive while the other two only recorded small operating losses.

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). We expect the stock to be re-rated following: (i) the divestment of its loss-making Indonesian operations, and (ii) its newer hospitals turning EBITDA positive post gestation period.

2. Health Supplements and OTC Drugs

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 regularly), 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. lowmargin contract manufacturing).

Meanwhile, backed by a new plant, widening distribution network and penetration into local public hospitals, we expect NOVA’s FY24F 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 by end 2023. We project pedestrian earnings growth in FY23 at level similar to preCOVID, 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).

3. Immunotherapy

According to Immunotherapy Drugs Market by Type, Therapy Area, End User - Global Forecast to 2025 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 - 3 Oct 2023