This article first appeared in The Edge Malaysia Weekly on December 23, 2024 - December 29, 2024

ANY uncertainty over the implementation of the diagnostic-related group (DRG) payment system, which the Ministry of Health plans to introduce in the private healthcare sector, has done little to change analysts’ outlook on the hospital operators listed on Bursa Malaysia.

Analysts believe in the healthcare groups' resilient long-term growth potential, with the possibility of higher valuations driven by new listings.

“We believe the DRG-related regulatory overhang could gradually subside after stakeholders engage in more in-depth discussions and cost-benefit analyses,” says HLIB Research in a Dec 19 note.

HLIB Research has an “overweight” outlook on the healthcare sector, with IHH Healthcare Bhd (KL:IHH) as its top pick, valued at RM9 per share. IHH was trading at RM7.09 apiece on Dec 20, having appreciated 18.36% year to date.

HLIB Research, the research arm of Hong Leong Investment Bank, believes IHH’s share price will exhibit greater upside in the event of an initial public offering (IPO)-led rerating. It says IHH’s Malaysian operation is one of the best-performing hospital assets in the country.

As IHH’s operational and financial metrics are comparable to those of Sunway Healthcare Group (SHG), HLIB Research believes IHH’s share price will have greater upside in the event of SHG’s listing.

SHG and Asia OneHealthcare (formerly Columbia Asia Healthcare) are expected to be listed in 2026 or earlier, according to reports.

Having said that, HLIB Research does foresee a compression of IHH’s margins if the DRG is implemented because it is being proposed by the government to address medical inflation — by setting a baseline reference price regardless of the actual cost of care for an individual.

“For example, the payment could be set at RM25,000 for a knee replacement surgery, and hospitals would need to manage their resources efficiently within this budget to ensure optimal outcomes,” the research firm notes.

On Dec 10, Prime Minister Datuk Seri Anwar Ibrahim announced that the government planned to regulate private hospital charges through an amendment to the Private Healthcare Facilities and Services Act 1998. One of the initiatives proposed is the introduction of the DRG payment system to replace the existing fee-for-service payment model.

Already, IHH is trading at a discount to its peer KPJ Healthcare Bhd’s (KL:KPJ) valuation, making it cheaper than KPJ and even Sunway Bhd (KL:SUNWAY).

“The share price performance of IHH has lagged its peers such as KPJ (FY2025 enterprise value/earnings before interest, taxes, depreciation and amortisation [EV/Ebitda] of 13 times) and Sunway. We consider the underperformance unwarranted,” says Kenanga Research in a note on Dec 10.

According to Kenanga Research, IHH trades at 13 times EV/Ebitda, which is a discount to the 20 times that Columbia Asia paid for Ramsay Sime Darby Health Care. The research firm says the valuation gap should narrow, given IHH’s impressive profit margins and dominant market position in the private healthcare space.

KPJ’s share price has rallied more than 70% so far this year, and closed at RM2.45 on Dec 20. The counter is valued at 34.43 times its trailing 12-month earnings, compared with IHH’s 23.54 times.

While Kenanga Research still likes KPJ for its pricing power as a private healthcare provider and its strong market position locally, with the largest network of 29 private hospitals (compared with IHH’s 18 hospitals), it believes the group’s fundamentals have been priced in.

“In terms of bottom-line profitability, we expect earnings to gain momentum moving into FY2025 on better operational efficiencies from its cost optimisation effort and overhead absorption rate as a result of a gradual ramp-up in opening new beds,” the research firm notes.

Kenanga Research has a “market perform” call on KPJ, with a target price of RM2.40.

KPJ is hopeful that with effective marketing and advanced technological equipment, Damansara Specialist Hospital 2 (DSH2) is capable of achieving double-digit top-line growth in the next few quarters.

DSH2 has a 120-bed capacity, which KPJ is increasing to between 205 and 265 beds in 2025. The group aims for half of its business at DSH2 in the financial year ending Dec 31, 2024 (FY2024), and FY2025 to come from medical tourism, capturing growth from the Middle Eastern market.

In the nine months to Sept 30, 2024, KPJ saw its medical tourism revenue rise 22% year on year to RM168 million. It aims for revenue from this segment to reach between RM200 million and RM250 million this year, or 5% to 7% of total revenue.

Meanwhile, TMC Life Sciences Bhd (KL:TMCLIFE) is perhaps the only private healthcare operator that has seen its share price decline this year. The counter has fallen 34% so far this year to 50 sen on Dec 20. No research firm covers the stock.

TMC Life Sciences’ share price fell despite a 3.5% increase in net profit for the financial year ended June 30, 2024 (FY2024), to RM40.65 million, versus RM39.26 million in the preceding financial year.

At 50 sen, TMC Life Sciences was trading at 20.99 times its FY2024 net profit.

The hospital group has been in the news because of the suspension and eventual dismissal of Wan Nadiah Wan Mohd Abdullah Yaakob as CEO, on allegations of misconduct. After being suspended from her role in January, Wan Nadiah was found guilty of all five misconduct allegations, following a domestic inquiry in early December. She has said she will appeal against her dismissal and continues to deny any wrongdoing.

According to a representation letter written by her that was filed with Bursa Malaysia, the five misconduct allegations relate to the termination of contracts with Great Eastern Life Assurance (M) Bhd and Allianz Life Insurance Malaysia Bhd, as well as the entry into a contract with T-Systems Malaysia Sdn Bhd.

For its first quarter ended Sept 30, 2024 (1QFY2025), TMC Life Sciences’ net profit sank 80.6% to RM2.94 million, from RM15.14 million a year earlier, as revenue fell 11.3% to RM81.97 million, coupled with higher staff costs and other operating expenses.

Nevertheless, TMC Life Sciences is expanding its operations with another hospital in Johor, following the establishment of its flagship Thomson Hospital Kota Damansara in 2008. The Johor hospital — Hospital Iskandariah — will have a 500-bed capacity and is targeted to be fully operational by 2030.

The group is expanding its referral centres to attract medical tourists, with the addition of Vietnam as its latest market, following Indonesia, China, Singapore and Europe. The group is also collaborating with Bangladesh Doctors’ Foundation to increase accessibility to second opinions for patients from the South Asian country. 

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