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'Overweight' call on healthcare sector

Publish date: Sat, 15 Jun 2024, 06:46 PM

KUALA LUMPUR: Hong Leong Investment Bank Bhd (HLIB Research) said it noted a recent performance divergence between IHH Healthcare Bhd and KPJ Healthcare Bhd.

IHH Healthcare reported an improvement in core profit after tax and minority interests (PATMI) both year-over-year (YoY) and quarter-over-quarter (QoQ) for the first quarter of 2024 (1Q24), whereas KPJ's continuing operations exhibited weaker results.

"The primary drivers of IHH Healthcare's stronger results were higher revenue and profit margins from its overseas operations in Singapore, India, Turkiye and Europe.

"Meanwhile, KPJ's results shortfall was predominantly impacted by higher-than-expected tax expenses, as KPJ's effective tax rates have historically been erratic," it added.

HLIB Research said the performance divergence could lead investors who have gained 95 per cent in KPJ since the end of 2022 to rebalance their hospital investments and shift to IHH Healthcare, primarily due to its improving overseas operations this year.

"Additionally, we think the market has already accounted for KPJ's disposal of inefficient assets, such as its Indonesian hospitals and Australian aged care business.

"While IHH Healthcare's growth plans, including a 33 per cent increase in group bed capacity by 2028, are well-known, we have specific views on the near-term profit drivers for its overseas operations that might have been overlooked," HLIB Research noted.

Consequently, the firm has reiterated an 'Overweight' call on the healthcare sector, with a 'Buy' call with a target price of RM7.62 on IHH Healthcare and a 'Hold' call with a target price of RM1.82 on KPJ.

HLIB Research has also raised its forecast for IHH Healthcare for the years 2024, 2025, and 2026 by 8.1 per cent, 8.2 per cent and 6.3 per cent respectively, to account for higher earnings before interest, taxes, depreciation, and amortisation (EBITDA) margin assumptions for its Indian operations.

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