Hospitals & Pharmaceuticals Sector - 1H24 Flashback

IHH and KPJ’s inpatient admissions in 1Q24 remained resilient despite the early Ramadan month in March (vs. April last year). The double-digit revenue growth mainly came from higher revenue per patient. Testament to this, IHH and KPJ’s inpatient revenue per admission for Malaysia operations increased by 10% and 11% to RM10,699 and 7,498 respectively.

As for Duopharma, the group recently secured an APPL contract from the Ministry of Health (MOH) worth RM578.1mn to supply 86 products to offices and facilities operated and controlled by the government until 31 December 2026. This contract will enhance Duopharma’s earnings visibility over the next 2.5 years. Meanwhile, Supercomnet’s earnings growth would remain robust, driven by Ambu’s endoscopy video cables. Overall, 1Q24 sector earnings rose 21.2% YoY to RM502.0mn boosted by higher patient revenue intensity and improved demand.

In terms of YTD share price performance, KPJ (+25.2%), Supercomnet (+19.2%) outperformed but IHH (-4.4%) and Duopharma (-8.9%) underperformed the FBMKLCI.

Patient Growth Intact

Moving into 2H24, we expect a persistent revenue growth fuelled by robust demand for quality healthcare services and healthcare megatrends. In addition, revenue per inpatient is expected to increase by about 10% in 2024 due to medical inflation and shortage of nurses. Given that current bed occupancy rates are c. 70%, KPJ targets to raise its bed capacity by approximately 368 new beds (mostly for KPJ Penang, KPJ Ampang, DSH2) to 4,101 in 2024. Meanwhile, IHH plans to add 160 new beds this year to approximately 2,982 operational beds by end-24. Overall, both IHH and KPJ would continue focusing on operational excellence for patient satisfaction and growth as a mean of defending their market shares.

As far as corporate exercise is concerned, we understand that the disposal of KPJ Dhaka (Bangladesh) will likely be in 2024 as Bangladesh is no longer a part of KPJ’s strategy. For IHH, the group is still in the midst of looking for potential earnings-accretive acquisitions in Indonesia, Vietnam, Malaysia and Europe.

Health Tourism, the Growth Driver

The Malaysian Healthcare Travel Council (MHTC) targets to generate RM2.4bn in revenue from the health tourism sector this year. Note that Malaysia’s healthcare travel industry recorded a total revenue of RM2.2bn in 2023, surpassing 2019’s figures by 33%. This is an endorsement of Malaysia’s growing reputation as a premier destination for medical tourism. Visitor arrivals from Indonesia remain as the highest contributor to health tourism in Malaysia, accounting for 70-80%. Overall, we are optimistic on the medical tourism prospect as the country will see more medical tourist arrivals with the visa-free entry decision, given to China and India tourists. In our opinion, this will allow tourists to come and get a second opinion from specialists, and to seek medical treatments if needed. In addition, we also believe that Malaysia will gain some market share from Singapore due to its less costly option.

In all, both KPJ and IHH have been actively targeting Indonesian market, via participations in Jakarta Expo and Malaysia’s Healthcare Expo in Surabaya. These initiatives would create market awareness and provides a platform to showcase its hospitals to Indonesian patients. Thus, we expect KPJ’s healthcare tourism revenue to increase by 68% to RM324mn in FY24. For IHH, we foresee its medical tourism volume growth across all key markets.

APPL to Boost Performance

We understand that the vendor selection process under the Approved Product Purchase List (APPL) is still ongoing between MOH and the vendors. As at 31 March 2024, 539 products from 80 suppliers have been selected, with the total APPL products expected to reach over 1,200 products. We believe that the APPL selection process would be concluded by September 2024 followed by non-APPL products thereafter.

We note that the highest spending on APPL orders would usually be in Q1s, with relative smaller and stable orders coming in Q2s & Q3s. Q4 would be the weakest due to closing of government accounts in December. As at 1Q24, orders from the government grew by 9.2% YoY backed by the new APPL contract. Despite the seasonally stronger 1Q performance, we expect Duopharma performance to improve in 2Q, backed by the new APPL contract and higher private sector sales.

Meanwhile, Supercomnet’s medical segment is expected to remain as the key driver of the group’s revenue. Demand from key customers such as Edward (35% of 1Q24 revenue) and Ambu (37% of 1Q24 revenue) are expected to grow by about 12% in FY24 while maiden contribution from IHS would likely begin in 4Q24. In our forecasts, we expect Supercomnet to register a profit growth of 31.9% in FY24.

Recommendation

We maintain our Neutral stance on the healthcare sector. Our top pick is Supercomnet (TP: RM1.73) based on 30.0x CY25 EPS. We like the group due to its strong earnings growth of 31.9% in FY24F, growing pipeline of new products as well as proven track record with tier-1 healthcare partners.

Source: TA Research - 2 Jul 2024