KUALA LUMPUR (June 12): Kenanga Investment Bank Research has maintained its “overweight” rating on the Malaysian healthcare sector and said private hospitals under its coverage stood, while pharmaceutical players fell behind in the recently concluded 1QCY2024.

In a sector update on Wednesday, the research house said this quarter marked a stable sequential earnings delivery against our expectations, with 50%/50% coming in within/below house forecasts compared to 20%/80% above/below against the preceding quarter.

Kenanga said the disappointment came largely from pharmaceutical players.

“Out of the five companies under our coverage, only Pharmaniaga Bhd (KL:PHARMA) (‘Underperform’; target price (TP): RM0.34) beat expectation.

“As for the other four: IHH Healthcare Bhd (KL:IHH) and KPJ Healthcare Bhd (KL:KPJ) (‘Market Perform’; TP: RM1.95) met expectations while conversely, Nova Wellness Group Bhd (KL:NOVA) (‘Outperform’; TP: RM0.70) and Kotra Industries Bhd (KL:KOTRA) (‘Outperform’; TP: RM5.35) came in below (expectations),” it said.

Kenanga said that in 2024, it expects IHH’s revenue per inpatient growth of 12% to 16% (versus an estimated 19% in 2023 due to low base effect in 2022), inpatient throughput growth of 9%-12% (versus an estimated 7% in 2023) and bed occupancy rate (BOR) of 65%-73% (versus an estimated averaging 65% in 2023) for its hospitals in Malaysia, Singapore, India and Türkiye.

“IHH expects its earnings momentum to accelerate, underpinned by revenue intensity and rising demand in 2HFY2024. It has pegged its charges to patients to consumer price index (CPI) across all of its key markets.

“It expects strong patient throughput in Türkiye, Singapore and Malaysia, after the festive season in 1QFY2024.

“We like IHH for its pricing power, as the inelastic demand for private healthcare services allows providers such as IHH to pass on the higher cost amid rising inflation, and its presence in multiple markets, i.e. Malaysia, Singapore, Türkiye and Greater China,” it said.

Kenanga said that similarly, in 2024, it expects KPJ’s patient throughput to grow at 9% (versus an estimated 7% in FY2023), with bed occupancy rate at 72% (vs. 67% in FY2023), driven by revenue intensity emanating from the recovery in demand for elective surgeries.

The research house said that the trend augurs well for Kotra, which manufactures and sells over-the-counter (OTC) supplements and nutritional and pharmaceutical products under key flagship household brands, such as Appeton, Axcel and Vaxcel.

“We also like Kotra for: (i) its integrated business model encompassing the entire spectrum of the pharmaceutical value chain from R&D (research and development), product conceptualisation to manufacturing and sales, and (ii) the superior margins of its original brand manufacturing (OBM) business model (versus low-margin contract manufacturing).

“However, the same cannot be said for Pharmaniaga (‘Underperform’; TP: RM0.34), which is still under the PN17 status.

Pharmaniaga’s 1QFY2024 results beat our forecast. Its 1QFY2024 core net profit jumped almost 10-fold on improved sales, efficiency gains and cessation of non-core units,” it said.

Kenanga said Pharmaniaga guided for sustained profitability (after an earnings spike in 1QFY2024), with moderate orders for medical supplies under the concession, impact from a price hike in 1QFY2024 and better inventory management.

“Its near-term profitability will be driven by: (i) closure of non-core and non-performing businesses involved in producing supplements and nutraceuticals products, and (ii) efficiency gain through ongoing inventory optimisation efforts and aggressive payment collection,” it said.