We reiterate our OVERWEIGHT call for the healthcare sector underpinned by rising affluence and an aging population. Global healthcare expenditure is projected 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: RM7.73), underpinned by revenue intensity and rising demand in 2HCY24.

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.

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 which 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 (MP; TP: RM2.11) patient throughput to grow at 10% (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%).

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 FY25 on better operational efficiencies from its cost optimisation effort and overhead absorption by adding new beds (+10%), which we have factored into our forecasts.

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, NOVA (OP; TP: 0.63) 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 - 2 Oct 2024