The recently concluded 2QCY24 results saw a slight sequential improvement in earnings delivery (against our expectations) by the sector. Generally, the solid private hospitals’ results in both IHH (OP; TP: RM7.73) and KPJ (MP; TP: RM1.95) were driven by significant pick-up in its operations across the board due to sustained demand, a case-mix of more acute patients and better yields. Meanwhile, health supplement and pharmaceutical players reported a mixed bag of results. PHARMA and KOTRA met expectations. However, NOVA disappointed as consumers temporarily cut down on purchases amidst weak spending sentiment. Reiterate OVERWEIGHT. Our Top pick for the sector is IHH (OP; TP: RM7.73).

Private hospitals stood out, mixed bag of results from pharmaceutical. This quarter marked a slight sequential improvement in earnings delivery against our expectations with 80%/20% coming in within/below our forecasts compared to 50%/50% within/below against the preceding quarter (see table on Page 2). The only disappointment came from NOVA (OP; TP: RM0.63). The remaining four companies under our coverage, IHH, KPJ (MP; TP: RM1.95), KOTRA (OP; TP: RM5.35) and PHARMA (UP; TP: RM0.34) met expectations.

• Private Hospitals

Solid 1HCY24 for private healthcare operators. Generally, private healthcare players in 2QCY24 under our coverage including KPJ and IHH registered QoQ bottomline growth underpinned by revenue intensity and rising demand as patients flocked back following the festive season in 1QCY24. IHH’s 1HFY24 results met expectations with core net profit rising 30% YoY driven by revenue intensity, better yields and a lower tax. It has pegged its charges to patients to consumer price index (CPI) across all its key markets. IHH expects its earnings momentum to accelerate, underpinned by revenue intensity and rising demand in 2HFY24. 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 1HFY24 results met expectations despite the slower festive period that led to patients delaying treatment. 1HFY24 earnings were driven by key operating indicators that remained solid. Mainly, the better showing was driven by higher inpatient throughput (+9%), outpatient (+1%), bed capacity (+7%), surgeries (+5%) and average revenue per inpatient (+7%) and outpatient (+6%). It is optimistic that new hospitals under gestation will halve their losses in FY24, driven by incremental revenues from higher patient throughput.

Outlook. 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 is rising chronic diseases globally. Specifically, the WHO 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.

In 2024, we expect IHH’s revenue per inpatient growth of 12% to 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 average 65% in 2023) for its hospitals in Malaysia, Singapore, India and Türkiye. 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 1HFY24. In our view, the ability to raise price to mitigate cost pressures arising from sustained inflation is a testament to IHH’s pricing power. We believe IHH has greater exposure to medical tourism by virtue of its vast overseas markets it operates in. Separately, we note that its recent acquisition of Island Hospital, which is expected to finalize by year-end, will likely be accretive to operating margins. We like the deal because Island Hospital has a commanding EBITDA margin of 30% with a profitable bottom line is a strategic fit to expand complementary services in Penang which is a location integral to its cluster strategy

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.

Similarly, in 2024, we expect KPJ’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.

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 priced-in the recent runup in its share price (YTD: +36%).

• Health Supplements and OTC Drugs

KOTRA’s results met expectations but NOVA fell short of our forecast. KOTRA met our expectation. However, NOVA’s FY24 results missed expectations due to: (i) consumers temporarily holding back purchases on weak spending sentiment, and (ii) lower-than-expected margin.

Outlook. Independent market researcher Statista in its 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 on a regular basis), especially in the aftermath of the Covid-19 pandemic.

The trend augurs well for KOTRA 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. lowmargin contract manufacturing).

Meanwhile, NOVA 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, the same cannot be said for PHARMA (UP; TP: RM0.34) which is still under PN17 status. PHARMA guided for orders to pick up in 3QFY24 at its medical supply unit following a weak showing in 2QFY24 (which we have factored into our forecasts) due to the festive season and delays in approved products purchase list (APPL) contract finalisation. It has guided that volume decrease in governmental contracts is expected to recover in 3QFY24 as more products will be procured under APPL. The group expect APPL product types to increase from presently 540 to >700 by end-CY24. Its 2QFY24 revenue fell 13% due to lower sales from its medical supply unit (-19%) with moderate orders from MOH but offset by better showing from generic drugs (+21%) from a low base. To recap, its 1HFY24 net profit jumped almost 5-fold to RM28.4m on improved revenue (+4% YoY), efficiency gains and cessation of non-core and non-performing businesses and reduced advertising and promotional expenses.

Source: Kenanga Research - 6 Sept 2024