• Metro Healthcare Berhad is a leading provider of obstetrics and gynaecologyhealthcare services in Malaysia, specializing in (i) fertility treatments, (ii) otherobstetrics and gynaecology services and (iii) complementary paediatric services,with 16 facilities across the country and a dedicated team of medicalprofessionals.
   
• We project a 3-year earnings CAGR of 16.9%, with core PAT anticipated to reachRM8.3m-RM9.9m over the next three years. This growth is underpinned by (i) theupcoming acquisition of a new maternity hospital in Klang Valley, (ii) tapping intonew opportunities in the East Coast and also (iii) lifestyle changes and increaseddisposable income among Malaysians.
   
• We assign a fair value of RM0.275 per share for Metro Healthcare, indicating a10.0% upside from the IPO price of RM0.25. This valuation is based on a PEmultiple of 28x.

Investment highlights

Strategic acquisition to boost obstetrics and gynaecology revenue. The group plans to allocate RM25m (63.9% of IPO proceeds) to acquire additional (i) maternity hospitals, (ii) new IVF centres and/or (iii) specialised clinics across Peninsular Malaysia, with RM17m earmarked for a maternity hospital in Klang Valley. The identified hospital is equipped with essential facilities including an outpatient clinic, treatment rooms, wards with 4 beds, a labour room, an operation theatre and a nursery with 4 bassinets, which all will further bolster the group's ability to deliver comprehensive obstetrics and gynaecology services and lead to higher revenue from the particular segment.

First outlet in Kelantan to tap into new growth opportunities. The group is set to establish its first fertility centre in the East Coast, MIVF Kelantan, which is expected to launch in early 2025. The expansion into the East Coast, where fertility services are currently limited, presents a significant growth opportunity and is anticipated to drive new revenue streams for the group moving forward. Since this is a new market to venture into, it offers the potential for a substantial revenue source if successful, along with the advantage of being a first mover in the region.

Upgrade and maintenance for enhanced brand stickiness. The group has allocated RM3.0m (7.7% of IPO proceeds) to refurbish and upgrade three maternity hospitals— (i) HWM Klang, (ii) HWM Banting and the (iii) upcoming Klang Valley maternity hospital—while also installing a centralized hospital information system (HIS) across its facilities. Upgrades will focus on enhancing entrances, receptions, pharmacies, waiting areas, air-conditioning systems, flooring, and roofing. These improvements are expected to elevate customer experience, strengthen brand reputation and increase brand loyalty, particularly as the group offers paediatric services for children up to 12 years old. According to the IMR report, the demand for paediatric services is expected to grow in view of increasing fertility and obstetrics and gynaecology services industry in Malaysia, despite the population of infants and children has decreased slightly (5.1m in 2018 vs 5.0m in 2023). Furthermore, the Ministry of Health (MoH) has introduced Child Health 2021-2030 which is a national framework to reduce mortality rate of children below 5 years old and support child growth and development.

Positive industry growth driven by lifestyle and income. The fertility and obstetrics and gynaecology industry in Malaysia experienced a compound annual growth rate (CAGR) of 14.2%, increasing from RM176.7m in 2018 to RM343.5m in 2023, and is projected to continue growing at a CAGR of 11.0% to reach RM469.6m by 2026. This growth is primarily attributed to:

(i) Lifestyle Changes: Increased sedentary behaviour and related health issues likestress and anxiety have led to a declining fertility rate in Malaysia, resulting in heightened demand for fertility services.

(ii) Income Growth: Malaysia's gross national income (GNI) per capita has risenfrom RM36.7k in 2015 to an estimated RM53.0k in 2023, alongside an increase in the female population from 9.2 million in 2015 to 9.6 million in 2023. This indicates a growing market for fertility and obstetrics and gynaecology services as disposable income increases and more individuals are willing to invest in family planning solutions.

Budget 2025 to benefit the industry. The recent Budget announcement by PM Anwar Ibrahim allows users to claim tax relief of up to RM10k for serious illnesses, fertility treatments, and vaccinations. This initiative is expected to encourage couples facing fertility issues to pursue fertility services, leading to an increase in demand for such services across the country.

Company background

Metro Healthcare Berhad is a prominent provider of obstetrics and gynaecology healthcare services in Malaysia, specializing in (i) fertility treatments, (ii) other obstetrics and gynaecology services and also (iii) paediatric services. Incorporated since 2010, the company transitioned to a public limited entity in 2011 and was listed on the LEAP Market of Bursa Securities in 2018. As of the LPD, the group operates 16 facilities across the central, northern and southern regions of Peninsular Malaysia, supported by a skilled team of 34 doctors, 16 embryologists, 50 nurses and other healthcare professionals dedicated to delivering high-quality patient care.

Business overview

Fertility services (43.4% of FY23 revenue). The group offers comprehensive fertility services designed to assist individuals in conceiving, addressing both male and female infertility through tailored treatment plans. The services encompass (i) Assisted Reproductive Technology (ART) procedures, which involve the manipulation and fertilization of ova outside the human body, and (ii) specialized fertility procedures that may precede or support ART treatments. Each treatment is personalized based on the patient's unique needs and circumstances, ensuring a holistic approach to fertility care.

Other obstetrics and gynaecology healthcare services (55.1% of FY23 revenue). The group offers other Obstetrics and Gynaecology services that focus on women's reproductive health throughout pregnancy and beyond. (i) Obstetrics services include outpatient care such as pre-pregnancy screenings, family planning counselling and antenatal services, as well as inpatient care for safe delivery, tailored to maternal and foetal conditions. Also, the group provides (ii) gynaecology services addressing various aspects of women's reproductive health, including treatment for disorders of the breasts, ovaries, uterus, and vagina.

Complementary services (1.5% of FY23 revenue). To complement its core healthcare offerings, the group also provides essential paediatric services for newborns and children (up to 12 years old). These services include (i) outpatient care, which encompasses consultations and scheduled vaccinations to protect against infections and diseases; and (ii) inpatient paediatric services for newborns delivered at its facilities, including screening, nursing care, and phototherapy treatment.

Financials

Revenue highlights. The group reported a 10.96% YoY increase in revenue, growing from RM40.3m in FY23 to RM44.7m in FY24. This growth was primarily driven by both the obstetrics and gynaecology healthcare services and paediatric services, which saw YoY growths of 11.6% and 2.6% respectively. While the fertility TCM service decreased significantly by 48.4% YoY, the group ceased to offer fertility TCM services starting in FY2023, which had led to a substantial decline in the particular segment.

Earnings forecasts. Moving forward, we project a 3-year earnings CAGR of 16.9%, with core PATMI expected to reach RM8.3m, RM9.6m, and RM9.9m over the next three years, largely supported by (i) the upcoming acquisition of a new maternity hospital in Klang Valley, (ii) tapping into new opportunities in the East Coast and also (iii) lifestyle changes and increased disposable income among Malaysians.

Valuations

We assign a fair value of RM0.275 per share for Metro Healthcare Berhad, representing a 10.0% upside from the IPO price of RM0.25. This valuation is based on a P/E ratio of 28x, pegged to FY25f EPS of 0.98 sen. We believed that the ascribed P/E is fair as the average historical P/E and forward P/E among its peers stood at 27.7-27.8x

Investment risks

Dependence on qualified medical personnel. The group’s success hinges on its team of qualified medical professionals, including doctors and nurses, who are essential for delivering healthcare services. Any loss of key personnel may adversely affect operations due to the challenges of recruiting suitable replacements in a competitive labour market. Additionally, most doctors are hired on a contractual basis, which may lead to staffing instability and disrupt continuity of patient care if contracts are not renewed.

Exposure to malpractice and negligence claims. As an obstetrics and gynaecology service provider, the group faces potential liability risks from malpractice or negligence claims related to service delivery. Although the group maintains malpractice indemnity insurance for its hospitals, there remains a risk that liabilities could exceed coverage limits or arise from uninsured activities, potentially harming the group’s financial condition.

Reliance on regulatory approvals. The group’s operations depend on various licenses and approvals from the Ministry of Health (MoH), which require periodic renewal. Noncompliance with regulatory requirements could lead to the revocation or suspension of these licenses, adversely affecting operations and profitability.

High drug inventory holding costs. The necessity of maintaining sufficient drug inventory for fertility treatments results in high holding costs, which can impact profitability. Inventory turnover has been increasing, and reliance on trade financing may further raise costs if not managed effectively. Fluctuations in drug prices due to foreign exchange rates could also affect financial performance.

Source: Mplus Research - 30 Oct 2024