It added that the local private healthcare sector has an added catalyst of medical tourism backed by highly competitive charges and hospitalisation costs, a generally English-speaking population and various government incentives.
AmInvestment's top pick is KPJ Healthcare with a buy call and fair value of RM1.14, due to its vast network of hospitals in Malaysia and potential growth from overseas expansion.
It has a hold call on IHH Healthcare with a fair value of RM5.58for its position in the premium segment of the private healthcare sector although it is cautious of risks from its Turkish operations.
On the downside, local private operators may be negatively impacted by the weakening ringgit vs the US dollar although a cheaper local currency may also boost the country's medical tourism volume.
"Malaysia’s medical tourists contribute close to 5% of IHH Healthcare and KPJ Healthcare’s revenue," said AmInvestment.
KPJ's average revenue per inpatient grew 9.7% year-on-year (y-o-y) in 1Q2019 while IHH's average revenue per inpatient trended higher in the same quarter with 7%, 7.5% and 27.2% y-o-y growth in Singapore, Malaysia and Acibadem respectively.
"We believe both groups enjoyed a better case mix while IHH benefitted from a higher occupancy rate and increased ASP in Turkey," said the research house.
KPJ’s EBITDA margin improved 3.7ppts YoY to 16.7% in 1Q2019 on the back of cost optimization initiatives while IHH’s EBITDA margin rose 1.0ppt YoY to 22.3% with better operational performance across its segments.
"Although we expect continued improvement in cost optimization and operational performances, we think this will be offset by higher gestation costs from new hospitals and lower contribution by IHH’s Fortis (EBITDA margin 10.8% in 1QFY19)," said AmInvestment.
Meanwhile, IHH’s Acibadem Holdings repaid US$250mil out of the outstanding US$670mil non-Turkish lira debt to deleverage its balance sheet and plans to reduce another US$360mil equivalent of non-lira debt.
"Hence, we can expect its interest expense to improve in 2H2019," said the research house.
Did you find this article insightful?