This article first appeared in The Edge Financial Daily on September 19, 2018
Healthcare sector
Maintain overweight: Core net profits for the second quarter of 2018 (2Q18) of the four healthcare companies under our coverage have all exceeded consensus expectations. Going forward, KPJ Healthcare Bhd and IHH Healthcare Bhd should see more robust patient volume growth off a low base attributed to a slight seasonal slump in 3Q17 due to the timing of the Raya season and the gradual structural recovery in broad consumer affordability. Both face contrasting foreign fortunes. While KPJ’s Indonesian operations have now stabilised and are expected to see minimal losses, IHH will likely see enlarged Turkish losses translated into ringgit given the sharp depreciation of the Turkish lira taking effect in 3Q18. Meanwhile, Apex Healthcare Bhd could raise its average selling price (ASP) in 4Q18 depending on market conditions post the implementation of the sales and services tax.
The new Pakatan Harapan government in its election manifesto aimed to elevate health expenditure from 4% of gross domestic product (GDP) to up to 6%-7% of GDP. Increased allocation represents a 50%-75% surge in healthcare expenditure but the source of funding appears uncertain at this juncture. Based on deliberated policy changes, it is possible that the middle 40% income group and top 20% income group may pay more for outpatient treatment while the bottom 40% income group appears to be subsidised by the government. More importantly, we examine and identify the impact of three prominently deliberated healthcare policies: i) Peduli Sihat nationwide implementation; ii) tripling of stand-alone private clinic consultation fees; and iii) monopoly break-up of pharmaceutical concession. While the generic pharmaceutical producers are the most likely to benefit, the sheer size of an expanded healthcare expenditure should well catalyse the sector.
KPJ’s current price-earnings ratio and enterprise value/earnings before interest, taxes, depreciation and amortisation valuations are both trailing its historical valuations and peers’. We believe valuations should even trade at a premium to its historical mean seeing domestic prospects are improving against diminishing regional risk factors. Domestically, we expect patient volume to recover off a low base against a high fixed operating leveraged supplementing healthy earnings for 2017-2020 compound annual growth rate of 10%. Additionally, we expect regional risk factors to dissipate going forward. — Affin Hwang Capital, Sept 18