Date: 08/09/2022
Reiterate OVERWEIGHT. There was a slight sequential deterioration in the recently concluded 2QCY22 results season (against expectations). However, we believe that the healthcare industry will continue to enjoy growth, supported by growing healthcare expenditure, rising medical insurance coverage, and an ageing population demographic. Our top pick is IHH (OP; TP: RM7.20) premised on: (i) its pricing power, as the inelastic demand of healthcare allows the passing-on of higher cost amidst the rising inflation, (ii) strong pent up demand, especially for elective surgeries, from domestic and international patients as economies come out of the pandemic, and (iii) its commanding market position in countries it operates in. On the other hand, KPJ is unattractive from the standpoint of equity investment over the short term as its new hospitals are still under the earnings-dilutive gestation period. A mixed bag of results. There was a slight sequential deterioration seen in the recently concluded 2QCY22 results season with 50%/50% coming in within/below vs. 33%/67% above/within our forecasts during the preceding quarter (see table on Page 2). IHH’s 1HFY22 earnings driven by recovery in elective surgeries. IHH’s 1HFY22 results met expectations driven by both patient throughput and higher revenue intensity, partly driven by a recovery in demand for elective surgeries. Its 1HFY22 earnings more than offset the 2QFY22 hit from MFRS 129 (classification of Turkey as a hyperinflationary economy) attributable to higher depreciation. Note that as a result of MFRS 129, the group’s property, plant and equipment carrying amount in Turkey were higher after reindexation. We highlight that its list prices have been adjusted for inflation in 1QFY22. However, due to the sustained high inflationary pressure, the group is reviewing a potential further price hike in 2H 2022 to realign with the corresponding cost increases. In Turkey, foreign patient revenue contribution remained strong at 14% (73% bed occupancy rate slightly lower QoQ due to seasonally lower period due to more public holidays in May). Its European operation’s contribution from Acibadem increased to 32% from 28%. While in India, non-Covid inpatient admission was higher than pre-COVID era. The group will continue to drive cost savings and ramp up productivity and increase bed occupancy ratio currently at 69% in India. NOVA’s FY22 earnings anchored by house brands. NOVA’s FY22 results were driven by house brands which accounted for 93% of turnover and more than offset lower OEM sales. We like NOVA (OP; TP: RM1.09) for its business model which encompasses the entire spectrum of value chain from product conceptualization starting from R&D to manufacturing, with growth driven by capacity expansion, a widening distribution network and penetration into local public hospitals. PHARMA’s vaccine sales fading in 1HFY22. We project FY22-23F earnings of PHARMA (MP; TP: RM0.59) to be on a downtrend in the absence of lumpy vaccine sales. Nonetheless, the regular orders for medical supplies from the MoH concession will remain stable (as the concession is expected to be renewed end-2022). However, PHARMA is bracing for a margin squeeze due by the cost of input such as active pharmaceuticals ingredients (APIs) that has sky-rocketed in recent months. We believe PHARMA’s inventory of cheaper APIs (APIs typically account for about 30% of total cost) will only last for the next 3-6 months. PHARMA would be unable to immediately and entirely pass on the higher cost of APIs given the restrictive terms of the concession with regards to price hikes, i.e. a revision in every three years, pegged largely to CPI. Meanwhile, we believe its Indonesian operation will continue to be driven largely by the growing product portfolio at its manufacturing arm. We like PHARMA for its strong earnings visibility backed by its long-term medical supply concession with the MoH, from which cash flow anchors a dividend yield of >5%. However, its appeal as a growth stock has diminished with falling demand for Covid-19 vaccine as most parts of the world are exiting the other end of the pandemic. New hospitals a drag on KPJ (MP; TP: RM0.87). Its 1HFY22 results disappointed as the rebound in patient throughput fell short of expectations. Its patient throughput will continue to normalise with the return of elective surgeries as the pandemic moves towards an end. We like KPJ for: (i) the inelastic demand of healthcare needs, allowing providers like KPJ to pass on higher cost amidst rising inflation, and (ii) its largest hospital network locally, putting it in a strong position to capitalise on a national healthcare insurance scheme, if it eventually materialises. However, it is unattractive from the standpoint of equity investment over the short term given as its new hospitals are still under the earnings-dilutive gestation period. Source: Kenanga Research - 8 Sept 2022 More articles on Kenanga Research & Investment >>
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