KUALA LUMPUR (April 23): Healthcare stocks still have legs to run following a recent rally and investors should continue to buy hospital operators for their further earnings growth this year, analysts said.

Traditionally known for its defensive quality backed by inelastic demand, Malaysia’s healthcare stocks will also benefit from medical tourism amid a surge in foreign tourists from China and India, said RHB Investment Bank. The house has an "overweight" call on the sector.

While the first quarter could be “muted” due to the seasonally shorter working months that coincided with the Lunar New Year celebration, results should “hold up steadily” in following quarters from higher patient growth as well as the spillover from the influx of foreign patients, RHB said.

For strategy, RHB advocates leaning towards domestic-centric names for better earnings stability with KPJ Healthcare Bhd as the top pick, citing the company’s target for 40% revenue contribution from health tourism by 2028, with hospitals under gestation seen achieving break-even in operating profit by end 2024.

Shares of KPJ Healthcare have climbed over 37% since the start of the year to reach a record high of RM1.98 earlier this month. At Tuesday’s close, the counter rose three sen or 1.55% to RM1.96, giving it a market capitalisation of RM8.87 billion. It is trading at a price-earnings (PE) ratio of 30.39 times.

IHH Healthcare’s share price increased by 3.09% to a high of RM6.34 in the morning session, its highest since August 2022. The stock pared gains to RM6.24 at the closing bell — still up nine sen or 1.46% — giving it a market capitalisation of RM54.96 billion. It is trading at a PE ratio of 18.62 times.

KPJ has nine "buy" and five "hold" calls with a 12-month target price (TP) of RM1.88, according to Bloomberg, while IHH has 16 "buy" and five "hold" ratings with a 12-month TP of RM7.11.

Private hospitals are intensifying their efforts to tap a growing pool of medical tourists, particularly from the West and the Middle East, who travel to Asian cities in search of lower-cost medical treatment.

This year, the sunrise industry is expected to generate RM2.4 billion in revenue, according to the Malaysia Healthcare Travel Council.

In 2023, Malaysia raked in more than RM1.9 billion in revenue from more than one million of such tourists seeking treatments ranging from heart bypass surgeries to hip replacements at a fraction of cost of such services in their home countries.

Kenanga Investment Bank, meanwhile, has IHH Healthcare Bhd as its top pick, as it bets on patient throughput growth and revenue intensity to drive FY2024 earnings, propelled by more acute cases including elective surgeries, as well as its presence in multiple markets.