This article first appeared in Capital, The Edge Malaysia Weekly on March 11, 2024 - March 17, 2024

Target price: RM1.86 OVERWEIGHT

RHB RESEARCH (MARCH 6): We maintain our “overweight” stance on the healthcare sector, underpinned by relatively inelastic demand trends coupled with rising health awareness among consumers and the trends of an ageing society. We expect demand for private healthcare to be underpinned by encouraging growth from medical tourists, a growing number of non-communicable diseasesand ageing society trends. While the healthcare sector generally has defensive attributes, we continue to advocate for investors to lean towards domestic-centric names as these provide better earnings stability.

KPJ Healthcare remains our sector top pick, premised on its strategic rebranding and upscaling exercise, a gradual pickup in the health tourism segment, and an improvement in operating efficiency as its hospitals under gestation are expected to achieve Ebitda breakeven by end-2024.

KPJ’s key focus will primarily be on implementing various key strategic initiatives (central procurement, digital transformation plan and asset optimisation) that have been announced. In driving its hospitals’ operating efficiency, KPJ expects the two remaining hospitals under gestation — KPJ Miri and Damansara Specialist Hospital 2 — to reach Ebitda breakeven by 2024.

For IHH Healthcare Bhd (“buy”, RM7.50 target price), its growth strategy will be cemented by its bed capacity expansion plan (looking to add 4,000 more beds) over the next five years. Nonetheless, we anticipate rising competition for nursing staff from its Singapore division following the recent public nurse retention scheme announced by the Singapore government, which could ultimately lead to a risk of margin compression.

According to the Malaysia Health Tourism Council, health tourism is expected to generate revenue of RM2.4 billion in 2024, implying 20% y-o-y growth against the estimated RM2 billion revenue in 2023 (revenue as at November 2023: RM1.96 billion). Key growth drivers are fuelled by the government’s decision to grant visa-free entry into Malaysia for up to 30 days for citizens from China and India; the availability of world-class quality healthcare facilities with services that come at competitive prices; and the ease of accessibility and communication.

For the drug makers, our outlook is underpinned by RHB economists’ rosier GDP growth expectation for Malaysia in 2024, anchored by China’s positive economic dynamics. A benign interest rate outlook should also be supportive of risk assets. With that, we are positive on Kotra Industries Bhd (“buy”, RM5.40 target price) as nutraceutical products are considered discretionary products. Meanwhile, the government’s higher budget allocation for buying medicine (2024F: RM5.5 billion compared with 2023: RM4.9 billion), as well as concluded price negotiations under the Approved Products Purchase List mechanism (contracts are set to be finalised by 1Q24) should support earnings growth for Duopharma Biotech Bhd (“buy”, RM1.41 target price).

Target price: RM7.88 ADD

CGS INTERNATIONAL RESEARCH (MARCH 4): IHH’s FY2023 core net profit of RM1.93 trillion was above expectations. Minimum payout ratio was raised from 20% to 30% following a record FY23.

Management previously guided the addition of 4,000 beds organically, to increase its total bed capacity by more than 30% from 12,330 beds as at end-FY23. On March 1, management said it targets to add 570 beds across Malaysia, India and Hong Kong in FY24F, suggesting that capacity expansion should only pick up from FY25F. Our revenue growth forecast of 13.5% y-o-y in FY24F outpaces IHH’s estimated capacity expansion of 4.6%, due to higher revenue intensity assumptions amid an increase in contribution from foreign patients across Malaysia, Turkey and Europe, as well as an increase in ambulatory care centres in Singapore and Hong Kong, which will allow better utilisation of bed capacity by decanting lower revenue-intensive activities into these facilities.

Reiterate “add” with a higher SOP-based target price of RM7.88 as we continue to like the different levers of growth available across its operating regions. Rerating catalysts include sustained double-digit ROE. Downside risks include margin compression due to lower bed occupancy exacerbated by capacity expansion, and acquisitions of non-earnings accretive hospitals.

Target price: RM2.66 BUY

HONG LEONG INVESTMENT BANK RESEARCH (MARCH 6): Independent storage rates should remain steady at S$6.50 per cu m per month and occupancy should stay at over 90%, supported by the heightened geopolitical tensions and concerns over energy security. Discussions are ongoing with a few prospects to secure long-term leases for its remaining land in Johor for Pengerang Phase 3. The upstream segment sees a stronger earnings base due to higher production from the Bayan field as T7 Elise MOPU achieved first gas in July. All loss-making legacy engineering, procurement, construction and commissioning contracts contributing to margin squeeze in the downstream segment will be completed by mid-CY24. The master service agreement with Petroliam Nasional Bhd expiring mid-May will likely be renewed at higher rates to match pre-Covid margins. We expect sequential margin expansion in the coming quarters.

We maintain our forecasts and “buy” call on Dialog with a higher SOP-derived target price of RM2.66 (from RM2.31) after imputing lower risk premium. We like Dialog for its recurring income business model and its unique position in riding the future expansion of Pengerang via development of tank terminals. We look forward to the group securing new long-term dedicated storage tank terminal contracts for its PDT Phase 3 with approximately 500 acres available for future development.

Target price: RM18.50 OUTPERFORM

KENANGA INVESTMENT BANK RESEARCH (MARCH 6): We came away from PPB’s post-FY23 results briefing feeling reassured of its near-term outlook. The demand for flour, feed and basic food products should remain robust on the back of a supportive job market in Malaysia, recovering tourist arrivals in Thailand and a buoyant Vietnam economy. Sales of its premium food products will remain soft, with new product launches veering towards essential food products as consumers focus on necessities. However, it is carefully repositioning its cinema business (Golden Screen Cinemas) with premium experience and niche products.

We cut our FY24/25F core net profits by 3% and by 4% respectively to reflect more gradual margin improvement. Correspondingly, we reduce our target price by 3% to RM18.50 (from RM19.10) based on 16 times FY24F PER, in line with the average of larger and well-capitalised integrated planters.

We continue to like PPB’s strong business position in consumer essentials such as flour, feed, ready-to-eat products as well as mass entertainment in Asean while its 18%-owned Singapore-listed associate Wilmar International Ltd provides exposure to China and India’s consumer markets. Maintain “outperform”. Risks to our call include weather impact on edible oil supply, unfavourable commodity price fluctuations and production cost inflation.

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