CIMB Research Neutral on healthcare sector, IHH and YSP top picks

Khazanah: RM670mil for new hospitals and extension of existing hospitals under IHH Healthcare Bhd

KUALA LUMPUR: CIMB Equities Research is retaining its Neutral recommendation on the overall healthcare sector where stocks under its coverage underperformed the FBM KLCI by 13% year-to-date.

It said on Friday this was due to broad-sector issues such as: i) weaker-than-expected earnings delivery, ii) higher cost pressures, and iii) sluggish consumer sentiment. 

Although long-term prospects for the sector are intact, there are no major re-rating catalysts at this juncture. 

Near-term risks such as high gestation costs for new hospitals and weak demand for pharmaceutical goods remain concerns, it added. 

“Our preferred pick in the hospital space is IHH as the best proxy for exposure to the premium healthcare segment in Asia. Among drug makers, we like YSP Southeast Asia for its cheaper valuations and growing export markets,” it said.

Healthcare stocks Hospital operators, e.g. IHH and KPJ were also affected by higher gestation costs of new hospitals. Pharmaceutical companies (Hovid, Pharmaniaga, YSP) suffered from the Ministry of Health’s (MOH, biggest drug purchaser in Malaysia) budget cuts, leading to lower demand for drugs. 

CIMB Research pointed out that despite a challenging operating environment, healthcare companies should deliver stronger 2H17 earnings. This is in tandem with seasonally stronger 2H, leading to better offtake of drugs and higher patient volumes. 

Earnings growth of hospital operators should also be buoyed by lower start-up costs from their new facilities. 

For drug makers, strong export demand should help offset lower local sales. However, any earnings improvement is unlikely to be substantial given the persistently weak consumer spending environment. 

Nonetheless, long-term prospects for healthcare companies remain intact, in our view. Local demographics look favourable, i.e. i) rising affluence leading to higher healthcare awareness, ii) an ageing population, and iii) wider insurance coverage. 

CIMB Research said  moreover, generic drug makers should benefit from the increased switching to generics given their higher affordability in the long run. We believe the reduced emphasis on building public healthcare facilities of late should lead to higher demand for private hospital services. 

“In our view, Malaysian hospital stocks’ premium valuations are fair (42 times P/E, in line with five-year mean of 44  times). 

“This is given their higher potential earnings growth vs. regional peers, buoyed by their aggressive expansion plans to capitalise on the rising demand in emerging markets. 

“However, pharmaceutical stocks trade at a discount vs. hospital stocks, at a lower average P/E of 17.7 times (in line with five-year mean). This is likely due to: i) high dependency on MOH orders, and ii) competitive nature of the generics market,” CIMB Research said.