This article first appeared in Capital, The Edge Malaysia Weekly on July 29, 2024 - August 4, 2024

OVERWEIGHT

RHB INVESTMENT RESEARCH (JULY 24): Private healthcare service providers’ (HSPs) growth here has surpassed the public sector’s (Figure 1) with a three-year compound annual growth rate (CAGR) of 2.6% versus 1.7% within 2019-2022. Yet, beds/1,000 people still fell short of developed nations (Singapore and the UK: 2.5, the US: 2.4). Under the 12th Malaysia Plan, the government has set a target of 2.08 hospital beds/1,000 to be achieved by end-2025 — this is seen by an increased healthcare budget capital expenditure for 2024 (+13% to RM6.1 billion). Several new private sector expansion plans have also been announced by the HSPs over the past few months as the private players undertake initiatives to expand their local presence. We estimate private hospital beds to grow further by at least 2.9% CAGR in 2022-2025, considering the various project pipelines in place. Sunway Healthcare Group (SHG) has the most ambitious plan: 1,600 new beds by 2030, aiming to raise total bed capacity to 3,000 (2024F: 1,400).

IHH Healthcare Bhd (KL:IHH) has the largest share on an absolute basis, with health tourism revenue of around RM220 million in 2023 or 11% of Malaysia’s total health tourism revenue. This is followed by 10% and 9% from KPJ Healthcare Bhd (KL:KPJ) and SHG. On a relative basis, SHG has the largest share of health tourism revenue contributions at 10% of the top line (IHH and KPJ: 5% to 6%).

We keep our view that the pharmaceutical segment should see a robust 2H24 recovery, underpinned by a pickup in consumer healthcare and over-the-counter product segments. Acceleration in trade and manufacturing activities, as suggested by RHB Economics, should underpin the growth of pharmaceutical firms with export exposure — for example, Kotra Industries Bhd (KL:KOTRA) (32%) and Duopharma Biotech Bhd (KL:DPHARMA) (8%).

We maintain our “overweight” stance on the healthcare sector and favour IHH as our top pick, predicated by its robust balance sheet (net gearing 0.26 versus KPJ’s 0.49), established medical technology infrastructure and appetite for inorganic growth. IHH’s valuation remains attractive, trading at 12.2 times 2024F EV/Ebitda or 0.6SD below its 15 times historical mean. KPJ trades at an 8% premium over IHH versus relative valuation historical means of -14.5% for both, which we deem unjustified, given IHH’s more aggressive expansion plans to drive growth.

Fair value: RM4.50 BUY

AMINVESTMENT BANK (JULY 24): We believe CelcomDigi Bhd (KL:CDB) benefits from site modernisation post-merger with opportunities to upgrade to greener and more efficient technologies. Currently, CDB uses energy-efficient tri-band ultra-broadband radio (UBR) from legacy radios. This modernisation is expected to enhance operational efficiency, reduce environmental impact and support sustainable growth.

Digi has brought over some of Telenor’s environmental, social and governance (ESG) practices into CDB’s operations. As a leading telecommunications operator in Europe, Telenor adopted global best practices in sustainability. As a result, CDB’s ESG performance is now aligned with Telenor’s standards.

In the long term, we view CDB’s prospects positively. The group has a competitive advantage as it has substantive spectrum holdings of 125Mhz (versus Maxis Bhd’s (KL:MAXIS) 115Mhz). CDB is also expected to enjoy cost savings from a streamlined network and the elimination of duplicate IT organisational costs.

As CDB’s share price has fallen 13% over the past six months, we upgrade our call to “buy” from “hold” with an unchanged DCF-derived fair value of RM4.50 per share (WACC: 7.3% and terminal growth: 2%). Our fair value incorporates a 3% premium for the group’s unchanged 4-star ESG rating, implying FY24F EV/Ebitda of 9.6 times, which is 0.5 standard deviation below its two-year average of 11 times.

Target price: RM3.30 BUY

HONG LEONG INVESTMENT BANK RESEARCH (July 24): We view IOI Properties Group Bhd’s (KL:IOIPG) acquisitions of (i) land in Pantai Kok, Langkawi, for RM90.1 million; and (ii) Tropicana Gardens Mall in Petaling Jaya, Selangor, for RM680 million, positively, especially for Tropicana Gardens Mall, given its strategic location, which is directly connected to an MRT station and its proximity to several townships.

We are confident that the group can enhance the value of the mall by increasing its occupancy rate and improving its tenant mix, capitalising on the group’s strong brand name, extensive experience in mall management and established relationships with retail brands.

After accounting for the Shenton House acquisition (RM3.53 billion), Tropicana Gardens Mall and Langkawi land, the group’s net gearing is anticipated to increase to 92.2% from 73.3% in 3QFY24. While the net gearing seems elevated, we highlight that the group is likely to recognise substantial revaluation gains from IOI Central Boulevard in the upcoming 4QFY24 results, which would lower the group’s net gearing.

We maintain our conviction “buy” recommendation with an unchanged TP of RM3.30 based on a 45% discount to our estimated RNAV of RM6. The stock remains grossly undervalued, especially when considering that its property investment and hotel assets are worth more than twice its market capitalisation, without even considering its land bank value yet.

Target price: RM2.12 BUY

MIDF RESEARCH (JULY 24): Axis REIT’s (KL:AXREIT) 1HFY24 core net income of RM79.9 million came in within expectations, making up 52% and 48% of our and consensus full-year estimates respectively. Axis REIT announced a second distribution per unit (DPU) of 2.25 sen (ex-date: Aug 5) for 2QFY24, bringing total DPU to 4.55 sen in 1HFY24.

We make no changes to our earnings forecast for FY24F/25F/26F. We see stable earnings prospects for Axis REIT in the medium to long term as the performance of industrial assets in Malaysia is expected to remain resilient on the back of stable demand for industrial space in Malaysia. Besides, Axis REIT is expanding its assets under management via acquisitions that should continue to underpin earnings and DPU growth. Note that Axis REIT has a total estimated value of target acquisitions of RM220 million.

Our TP for Axis REIT is maintained at RM2.12, based on a dividend discount model. We continue to favour the industrial asset-focused Axis REIT, where healthy demand for industrial assets should continue to drive the REIT’s earnings growth. Besides, the rental contribution from newly acquired assets should support earnings growth in 2HFY24. Hence, we maintain our “buy” call on Axis REIT. Meanwhile, the distribution yield is estimated at 4.2%.

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