The recently concluded 3QCY24 results saw a slight sequential deterioration in earnings delivery (against our expectations) by the sector. Generally, the solid private hospitals' results from both IHH (OP; TP: RM8.11) and KPJ (MP; TP: RM2.40) were driven by significant pick-up in their operations across the board due to sustained demand, case-mix of more acute patients, and better yields. Meanwhile, health supplement and pharmaceutical players reported mixed bag of results. PHARMA and NOVA missed expectations. However, KOTRA reported double-digit top-line improvement. Reiterate OVERWEIGHT. Our Top pick for the sector is IHH (OP; TP: RM8.11), which we consider still a laggard to peers.

Private hospitals stood out, mixed bag of results from pharmaceutical. This quarter marked a slight sequential deterioration in earnings delivery against our expectations with 60%/40% coming in within/below our forecasts compared to 80%/20% within/below against the preceding quarter (see table on Page 2). The disappointments are from NOVA (OP; TP: RM0.56) and PHARMA (MP; TP: RM0.39). The remaining three companies under our coverage, IHH, KPJ (MP; TP: RM2.40), KOTRA (OP; TP: RM5.35) met expectations.

• Private Hospitals Solid 9MCY24 for private healthcare operators. Generally, private healthcare players in 3QCY24 under our coverage including KPJ and IHH registered QoQ double-digit bottomline growth underpinned by revenue intensity and rising demand as patients flocked back following the festive season in 2QCY24. IHH's 9MFY24 results met expectations with core net profit rising 35% YoY driven by revenue intensity, better yields and a lower tax. IHH expects its earnings momentum to accelerate, underpinned by revenue intensity and rising demand in 4QCY24. This would be supported by higher yield services both in Singapore, return of medical tourists in Acibadem, and post-election effect in India.

Separately, KPJ's 9MFY24 results met expectations driven by higher inpatient throughput (+8%), outpatient (+1%), bed capacity (+7%), surgeries (+5%) and average revenue per inpatient (+6%) and outpatient (+6%). Citing incremental revenue from higher patient throughput and improving operational efficiency, KPJ highlighted that 9MFY24 losses at its new hospitals under gestation declined by >50%.

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, Türkiye and Greater China.

The share price performance of IHH has lagged its peers such as KPJ (FY25 EV/EBITDA of 13x) and SUNWAY. We consider the under-performance unwarranted. IHH trades at 13x EV/EBITDA discount compared to 20x that Columbia Asia paid for Ramsay Sime Darby Health Care. The valuation gap should narrow given IHH's sheer size in terms of profitability and dominant market position in the private healthcare space and easing operational challenges regionally. This is especially so as the locally focused KPJ (MP; TP: RM2.40) and SUNWAY (UP; TP: RM3.35) have seen their share prices rising 76% and 124% YTD CY24, respectively, vs. IHH (+22%).

We also like KPJ (MP; TP: RM2.40) for its pricing power as a private healthcare provider and its strong market position locally with the largest network of 29 private hospitals (vs. 18 of the next largest player IHH). However, the fundamentals have been priced-in after the recent run-up in its share price (YTD: +36%). It is optimistic of a total 4,100 beds (+13% YoY) by end-CY24.

Beyond CY24, it will add >1,500 beds (>+30%) bringing total beds to 5,000 over the next five years which we have already factored into our forecasts. In terms of bottom-line profitability, we expect earnings to gain momentum moving into FY25 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 (+7%). With incremental revenue from higher patient throughput, Damansara Specialist Hospital 2 (DSH2), KPJ Perlis, KPJ Batu Pahat and KPJ Bandar Dato Onn have already turned EBITDA-positive in 9MFY24 except for Miri which we expect to achieve the same in CY25. The group is hopeful that with effective marketing and advanced technological equipment, DSH2 is capable of achieving double-digit topline growth in the next few quarters. It has conducted its first robotic surgery on partial nephrectomy. Presently, DSH2's bed capacity is 120 beds, to be increased to 205-265 beds in 2025. Initially, DSH2 is targeting 50% medical tourism portion in FY24-FY25 by offering cardiac services through collaboration with consultants to bring in patients from the Middle East. KPJ's 9MFY24 medical tourism revenue rose 22% YoY to RM168m and is targeted to reach RM200m-RM250m in FY24 (5%-7% of our FY24F revenue) where almost 50% of the patients are from Indonesia.

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: RM5.35) 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, NOVA (OP; TP: RM0.56) is ramping up production at its new plant during the year. There is also earnings impact from the introduction of 15-20 new SKUs in FY23 (in addition to 35 in FY22) including skincare products, health supplements, and Activmax and Sustinex range of functional food products such as plant-based protein including specialty Activmax for hospitals. 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, for PHARMA (MP; TP: RM0.39) while not out of the Practice Note (PN17) woods yet, the outlook for its medical supply unit has improved, and Kenanga had upgraded it to MP from UW during the results review season. The group anticipate further growth in the medical supply unit in 4QFY24 and in CY25, as the number of active products under the Approved Product Purchase List (APPL) is expected to increase from 655 products in 3QFY24 to 832 products by end-CY25. This expansion is projected to drive both sales and volume within the concession segment. A significant milestone was reached in its biopharmaceutical venture with the official launch of Malaysia's first local manufacturing plant on 9 Sept 2024. This facility exemplifies Pharmaniaga's capabilities in local manufacturing, supporting the Government's efforts in import substitution and supply security. In addition to this, the Group's flagship recombinant human insulin product received regulatory approval from the National Pharmaceutical Regulatory Agency (NPRA) in November 2024 and is expected to be supplied to government hospitals by 1QCY25.

Source: Kenanga Research - 10 Dec 2024