Healthcare seen supported by medical tourism

Top pick: A KPJ hospital in Perlis. AmInvestment Bank has maintained its neutral stance on the sector, with KPJ as its top pick with a buy call and a fair value of RM1.12.

PETALING JAYA: The weakening ringgit against the US dollar may not be all negative for the healthcare sector, especially with the Malaysia Year of Healthcare Travel 2020.

While hospitals may be adversely affected as the costs of key inputs like drugs, medical supplies and equipment are affected by the greenback, the other side of the coin would be the boost in medical tourism.

AmInvestment Bank Research said Malaysia’s medical tourists contribute some 5% to 6% of revenue to IHH Healthcare Bhd and KPJ Healthcare Bhd.

The research house expected the operational metrics of hospitals to continue to improve on the back of the rise in medical tourism.

Growth prospects are positive for the sector globally over the long term, underpinned by an aging population, rising affluence and increasing life expectancy.

On another note, AmInvestment Bank said the gestational costs of newly opened and upcoming hospitals may limit the net margin improvement of the private healthcare players next year to around plus-minus one percentage point.

KPJ is targeting to add around 474 beds in 2020 with three new hospitals and the expansion of five existing hospitals while IHH planned to open a new 450-bed hospital in Shanghai by 2019.

It is also focusing on improving operations in its recently acquired Fortis Healthcare.

“We also anticipate hospitals to be hit by the impending drug pricing control.

“Although there is still no clear guideline, we believe any impact can be partially covered by other charges such as hospital bed charges, consumables and medical devices, ” it said.

Sales of drugs contribute between 20% and 25% of revenue for hospitals.

The Health Ministry recently announced that it intended to use external reference pricing (ERP) to benchmark drug prices with the average three lowest reference prices to determine the ceiling price sold to dispensing channels in Malaysia.

AmInvestment Bank maintained its “neutral” stance on the sector, with KPJ as its top pick with a buy call at a fair value of RM1.12.

It also rated IHH as “hold” with a fair value of RM5.40 due to its strong prospects but it is wary of the geopolitical risks from IHH’s Turkish and China operations due to the volatile currency and political climate.

TA Securities Research, which also maintained its neutral call on the sector, said IHH and KPJ will continue to thrive in their respective markets with the ramping up of existing operations.

It expects the earnings before interest, tax, depreciation and amortisation (EBITDA) of IHH to remain flattish at 21.5% due to the gestation period of Gleneagles Chengdu and Gleneagles Shanghai.

“Gleneagles Hong Kong is expected to continue to narrow down its losses, following the commissioning of more beds.

“Meanwhile, Fortis’ EBITDA margin is expected to improve to 15.7% as compared to 6.6% in 2QFY19, due to higher occupancy rates and lower cost, ” it said.

The research house added that it did not discount the possibility of seeing corporate exercises from IHH and KPJ.

It expected IHH’s proposed acquisition of Prince Court Medical Centre to be completed in 1H20, adding that the management is also considering divesting some assets to rebalance its portfolio.

KPJ is also continuing its search for prospective buyers for Jeta Gardens, Australia, which has been affected by ongoing Aged Care Royal Commission and the increase in Home Care packages made available by the Australian government.

On the pharmaceutical front, TA Securities said the growth in demand for generic drugs is expected to continue, given the resilient and higher demand from public and private sectors.

It finds the Health Ministry’s target to reduce the usage of original or patented drugs for more generic drugs to lower healthcare expenditure as a positive move for Duopharma Biotech Bhd, which aimed to launch more specialty products, specifically in the diabetes, renal, oncology and cardio segment.

The research house’s top pick is Duopharma with a “buy” call and target price of RM1.70.

It also recommended a buy on KPJ with a target price of RM1.05 and hold on IHH with a target price of RM5.96.

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