This article first appeared in The Edge Financial Daily on June 14, 2018

Healthcare sector
Maintain positive: In the recently concluded earnings season, KPJ Healthcare and healthcare support services (HSS) provider UEM Edgenta Bhd posted earnings that were in line with our full-year earnings estimates. Due to this, we have maintained our full-year earnings estimates for KPJ and increased our estimates for UEM Edgenta. However, we have revised our financial year 2018 (FY18) to FY19 earnings estimates for IHH Healthcare Bhd and Pharmaniaga Bhd as we opine that meaningful recovery in earnings will only be visible in second half 2018 (2H18). During the quarter, IHH experienced high operating costs associated with opening of new hospitals which disrupted earnings growth whilst KPJ had lower inpatient and outpatient admissions in Indonesia. That said, most healthcare operators reported year-on-year improvement in earnings due to the revision in prices to accommodate inflation effects on operating expenditure (opex) increase in number of complex cases undertaken and increase in contribution from existing and newly opened hospitals.

We reiterate our view that we expect earnings of the private healthcare operators to display further improvements from 2H18 onwards. As per 1H18, we are expecting revenue and earnings growth to be mainly driven by organic growth from existing hospitals as well as hospitals that were newly opened back in 2015 to 2017. In addition, we are also expecting the opening of new specialisation wards in recently opened hospitals will contribute positively to the operators’ earnings as well. Furthermore, as the contribution from newly opened hospitals grows, it will offset the high opex associated with the opening of the new hospitals.

Aside from the organic growth from existing and new hospitals, we are also expecting better revenue in 2H18 as the zero-rated goods and services tax (GST) will encourage inpatient admissions and outpatient visits to private hospitals. Despite the GST being zero-rated for three months pending the reintroduction of sales and services tax (SST), we believe this will nonetheless encourage the patients who have been delaying surgery or treatment to come in and take advantage of the zero-rated GST period due to the increase in disposable income. Furthermore, with the current stable currency situation patients could also take advantage of lower medical consumable costs compared with last year. — MIDF Research, June 13