Underweight on healthcare sector’s outlook
KUCHING: Analysts maintained their ‘underweight’ rating on Malaysia’s healthcare sector which is expected to be dull in terms of earnings growth and further capped by expensive valuations.
The research team at Kenanga Investment Bank Bhd ( Kenanga Research) pointed out that the fourth quarter of 2018 ( 4Q18) results season saw a mixed bag from healthcare companies under its coverage.
In particular, KPJ Healthcare Bhd’s ( KPJ) valuation appears to be attractive again as the group is confident that start-up costs from new openings will be absorbed by incremental rampups from earlier openings, and steady contributions from matured hospitals.
“Earnings growth is expected to come from narrower losses and profitability for hospitals built two to three years ago including KPJ Rawang, Maharani, Pasir Gudang and Pahang. KPJ Perlis (greenfield, 90 beds).
“Elsewhere, brownfield expansions include KPJ Miri ( 96 beds) and KPJ Kuching (150 beds) which are expected to start operating by 2Q19. KPJ Bandar Dato Onn has commenced operation in end 4Q18,” said the research team.
It pointed out that the stock is currently trading at 15 and 40 per cent discount compared with its historical average of 28- folds and regional peers of 35-folds, respectively.
The 40 per cent discount to regional peers is wider compared to the historical average of 30 per cent, it added.
According to Kenanga Research, IHH Healthcare Bhd ( IHH) also reported better-thanexpected earnings for 4Q18 due to higher- than- expected revenue per patient.
However, it said it remained concerned over issues at Fortis, including an auditor’s qualified audit report in FY18, which has been carried forward into the quarterly review on February 13, risk of more provisions, lapses in internal controls, which led to regulatory probing, which could well mean execution risk exposure.
“However, earnings continued to be dragged down by foreign exchange losses on Acibadem Holding’s non-Turkish lira denominated borrowings. The stock is expected to continue to be de-rated and weighed down by marked-to-market volatility on translation of non-Turkish lira borrowings,” it added.
“Looking ahead, over the short- to- medium term, IHH is expected to face higher operating costs arising from wage inf lation as a result of increased competition for trained personnel and startup costs on pre- opening of hospitals, including Gleneagles Hong Kong (GHK) which will put pressure on cost and margins.
“Since June 2018, the Turkish lira has depreciated significantly against the US dollar, euro and ringgit, with continued volatility in the currency. This will results in foreign exchange translation losses on the Group’s balance sheet and income statement,” Kenanga Research projected.
As for the performance of Pharmaniaga Bhd ( Pharmaniaga), the research team said, the group is clouded by uncertainty in the renewal of medical supplies concession.
It said, it is uncertain of the renewability of the government’s medical supplies concession agreements with Pharmaniaga.
It explained: “We are uncertain of the renewability of the contract but Pharmaniaga has the track record, platform and systems in place for the distributions of medical supplies.”
Mevertheless, it said, Pharmaniaga’s Indonesian operations remain a key area of growth, while further progress is being made in the European Union as the group seeks to expand its global presence.
“In tandem with this, the group is focused on implementing continuous cost optimisation measures across its operations. Over the longer term, we expect its manufacturing division to propel earnings growth.
“The group aims to add about 200 new products over the next 10 years to its existing portfolio of around 500 products, which should boost revenue and lift earnings,” it added.
All in, Kenanga Research noted that it is estimated that during the 2010 to 2040 period, Malaysian population aged 65 and over will increase to more than three- fold the 2010 population.
“The increase will categorise Malaysia as an aging population society in 2021 when the population aged 65 years and above reach 7.1 per cent.
“Based on the United Nations ( UN)’s definition, an aging society is when the population aged 65 and over constitutes seven per cent of the total population. Population for the age group 0–14 years is projected to decline from 27.4 per cent to 19.6 per cent for the same period.
“However, the population for the age group 15 to 64 years and 65 years and over is expected to increase by 1.4 and 6.4 percentage points, respectively, for the same period,” it added.