We reiterate our OVERWEIGHT call for the healthcare sector underpinned by rising affluence and an aging population. Global healthcare expenditure is projected to to grow at a CAGR of 3.5% to reach USD10t by 2026. We expect both domestic and international patient throughput to continue to grow while revenue intensity to improve, driven by a high-yield case-mix with more acute cases. The ramp-up of new beds will boost operational efficiency, cost optimisation and overhead absorption. Similarly, we see robust sales of pharmaceuticals and over-the-counter (OTC) drugs backed by increased health awareness. Our sector top pick is IHH (OP; TP: RM7.00).

1. Private Hospitals

Global healthcare expenditure is projected to grow at a CAGR of 3.5% to reach USD10t by CY26, underpinned by rising affluence and aging populations (see chart on next page). The demand for healthcare, a basic necessity, is inelastic despite high inflation. Another key driver is rising chronic diseases across the globe. According to WHO, 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 FY24 earnings, propelled by more acute cases including elective surgeries. IHH expects its earnings momentum to accelerate, underpinned by revenue intensity and rising demand in 2HFY24. It has pegged its charges to patients to consumer price index (CPI) across all its key markets. It expects strong patient throughput in Turkey, Singapore and Malaysia after the festive season in 1QFY24.

In FY24, we project IHH’s revenue per inpatient growth of 12% to 16% (vs. an estimated +19% in FY23 due to low base effect in FY22), inpatient throughput growth of 9% to12% (vs. an estimated +7% in FY23) and bed occupancy rate (BOR) of 65% to 73% (vs. an estimated averaging 65% in FY23) for its hospitals in Malaysia, Singapore, India and Türkiye.

IHH plans to add >4,000 beds (+30%) over the next five years across Malaysia, India, Türkiye and Europe. It expects patient throughput to gradually recover in Singapore with the addition of new beds (previously constrained by staff shortages which are gradually easing). Meanwhile, Acibadem’s operating environment in FY24 will be more favourable as compared to FY23 and it expects earnings drag to gradually ease in Türkiye (with the return of foreign patients). In 4QFY23, Acibadem’s European operation has already recovered. We expect sustained performance in Malaysia. In Hong Kong, it is optimistic and targeting Gleneagles Hong Kong to be bottom-line positive in FY24 due to better operational efficiencies and overhead absorption rate as a result of strong ramp-up in its operations including opening new beds.

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. IHH is our top sector pick.

Similarly, in 2024, we expect KPJ (MP; TP: RM1.95)’s patient throughput to grow at 9% (vs. an estimated 7% in FY23) with BOR at 72% (vs. 67% in FY23), driven by revenue intensity emanating from the recovery in demand for elective surgeries.

Losses from KPJ’s five new hospitals narrowed 30% YoY in 1QFY24. It is optimistic that its five hospitals under gestation with losses totalling RM137m in FY23 will be halved in FY24, which will work out to RM69m or 25% of our FY24F net profit driven by incremental revenues from higher patient throughput. KPJ’s earnings will also be driven by new beds and improving operational efficiency. It expects earnings to gain momentum moving into FY24 on better operational efficiencies from its cost optimisation effort and overhead absorption by adding new beds (+10%), which we have factored into our forecasts.

We also 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). However, the fundamentals have been priced-in by the recent run-up in its share price.

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: 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, backed by a new plant, widening distribution network and penetration into local public hospitals, we expect the FY24 sales volume of NOVA (OP; TP: RM0.70) to rise by 5%, fuelled by gradual ramp-up of its new plant and the full-year impact from 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, the same cannot be said for PHARMA (UP; TP: RM0.34) which is still under PN17 status. PHARMA’s 1QFY24 results beat our forecast. Its 1QFY24 core net profit jumped almost 10-fold on improved sales, efficiency gains and cessation of non-core units. PHARMA guided for sustained profitability (after an earnings spike in 1QFY24) with moderate orders for medical supplies under the concession, impact from a price hike in 1QFY24 and better inventory management. Its near-term profitability will be driven by: (i) closure of non-core and non-performing businesses involved in producing supplements and nutraceuticals products, and (ii) efficiency gain through on-going inventory optimisation efforts and aggressive payment collection. Looking ahead, it is building four new warehouses, being part of its RM220m capex plan to be funded with proceeds from a rights issue and a private placement of new shares. This is to meet the requirement in relation to the government concession to provide timely delivery of drugs and non-drugs products to government facilities throughout the country. In the biopharmaceutical space, it is establishing manufacturing facilities for vaccines and insulin to cope with the increasing needs in these therapeutic areas. The project is on track for commercialisation for vaccines in 2025 and insulin in 2026 namely Recombinant Human Insulin and Analogue Insulin.  

Source: Kenanga Research - 31 Jul 2024