We reiterate our OVERWEIGHT call for the healthcare sector. The demand for private healthcare will continue to gain traction in CY24, underpinned by growing patient throughput and higher yields from a case-mix with more acute cases. Also helping will be better operational efficiency, cost optimisation and overhead absorption thanks to a gradual rampup of new beds. Similarly, we see robust sales of pharmaceuticals and over-the-counter (OTC) drugs backed by increased health awareness. Over the longer term, the prospects of private healthcare will continue to be underpinned by rising affluence and an aging population. Our sector top picks are KPJ (OP; TP: RM1.56) and IHH (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.

We project IHH’s patient throughput growth and revenue intensity to drive 2024 earnings, propelled by more acute cases including elective surgeries.

In 2024, we project IHH’s revenue per inpatient growth of 12%−16% (vs. an estimated +19% in 2023 due to low base effect in 2022), inpatient throughput growth of 9%−12% (vs. an estimated +7% in 2023) and bed occupancy rate (BOR) of 65%−73% (vs. an estimated averaging 65% in 2023) for its hospitals in Malaysia, Singapore, India and Türkiye. We believe the key growth factor for its inpatient throughput and BOR would be revenue intensity from a case-mix with more acute cases and medical tourists, the addition of new beds (previously constrained by staff shortages which are gradually easing). We expect sustained performance in Malaysia, while staff shortages in Singapore have been resolved. There is also a return of Middle Eastern and Central Asian medical tourists to its hospitals in Türkiye and India.

We also like IHH for its: (i) 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 (ii) presence in multiple markets, i.e. Malaysia, Singapore, Türkiye and Greater China.

Similarly, in 2024, we expect KPJ’s patient throughput to grow at 8% (vs. an estimated 6% in FY23) with BOR at 71% (vs. an estimated 68% in 2023) driven by revenue intensity emanating from 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 expect KPJ’s earnings to gain momentum moving into FY24 on better operational efficiencies from its cost optimisation effort and overhead absorption rate as a result of a gradual ramp-up in opening new beds (+9%) which we have factored into our forecast.

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). Thanks to high patient throughput, two of its new hospitals have turned EBITDA-positive while the other two only recorded small operating losses.

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 (OP; TP: RM6.03) 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 the FY24F sales volume of NOVA (OP; TP: RM0.84) 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: RM0.31) which is still under the PN17 status. PHARMA guided for no further provisions going forward. However, it still holds some unsold vaccines (which have already been fully provided for) and has managed to sell some of them. To exit the PN17 status, it has proposed: (i) a capital reduction of RM180m issued share capital, (ii) a 4-for-5 rights issue of 1.18b new PHARMA shares with 1.18b free warrants (a shareholder who owns 5,000 PHARMA shares is entitled to subscribe for 4,000 new shares and get 4,000 free warrants), and (iii) a private placement of 714m new PHARMA shares or 26.9% of the enlarged issued share capital after the proposed rights issue. The exercise will result in massive EPS dilution due to the tripling of its share base.

We project pedestrian earnings in FY24 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 RM264m as at 30 Sep 2023 impeding its ability to give out dividends, and (ii) the government seeking better value-formoney contracts and PHARMA might have to offer new rates that are more competitive (which we have reflected in our forecasts).

Source: Kenanga Research - 28 Dec 2023