KUALA LUMPUR: With the gradual easing of movement restrictions starting from mid-2020, some healthcare players may see better earnings recovery in the months to come, giving the sector a slight boost.
Patient volume is expected to recover progressively while revenues for some players may be mitigated by offering Covid-19-related services.
Consequently, Kenanga Research, in a note yesterday, upgraded the healthcare sector to “neutral” from “underweight” previously.
Among the healthcare providers under its coverage, IHH Healthcare Bhd remained a star as the group has solid captive markets in growth locations. IHH is also seen to have commanding market positions in Singapore, Malaysia and Turkey, and is steered by a strong management.
The group’s local patient volumes are seeing recovery and occupancy have risen between 45% and 75%. Occupancies at the group’s hospitals in Malaysia and Singapore recovered to about 64% and 85% of pre-Covid-19 levels in the fourth quarter ended Dec 31,2020 (Q4FY20), respectively.
With the group’s proactive initiatives to partially mitigate the effects of lower patient volumes by improving case-mix and providing Covid-19 screening services, IHH also saw better contributions from Covid-19-related services.
According to Kenanga, Covid-19-related services contributed about 11%, 12% and 21% of the Q4FY20 revenues in Singapore, central eastern Europe region and India, respectively.
In Malaysia, the group’s hospitals will allocate approximately 10% of bed capacity to treat Covid-19 patients and have also taken in non-Covid-19 patients decanted from public hospitals, and will be setting aside about 200 beds for this purpose.
The brokerage has an “outperform” call on IHH with a target price of RM6.05, noting that IHH is set for earnings recovery in FY22 underpinned by its India operation and with its business in Turkey showing signs of a faster-than-expected recovery.
“Thus far, the group has further deleveraged its non-lira debt in its Turkish operations from EUR288mil as at Dec 2019 to EUR37mil as at Dec 2020, ” Kenanga said.
The group is targeting EBITDA break-even in Gleneagles Hong Kong while its operations in India remain focused on driving cost savings and ramping up productivity and capacity.
IHH said its Parkway Shanghai is expected to open in end-2021 or early 2022.
Meanwhile, Kenanga also reiterated its “market perform” recommendation on KPJ Healthcare Bhd as its valuations have become attractive again. It has a target price of RM1 for the stock.
“Looking ahead into 2021, the group will continue to take advantage of government’s incentives in order to mitigate the adverse effects of the pandemic. Under the Permai assistance package, the group has offered to collaborate with government hospitals to treat non-Covid-19 patients in an effort to alleviate the strain on the public healthcare system, ” the research house said.
However, it also noted that KPJ’s new hospitals are under a gestation period and could continue to drag down its overall earnings.
Elsewhere, while Pharmaniaga Bhd has secured an agreement with the government to supply Covid-19 vaccines, Kenanga has expressed uncertainty over the group’s earnings visibility beyond 2021.
Additionally, it is still unclear at this stage as to how the vaccine contracts would impact the group financially.
“We also like to stress here that profit before tax margin for the logistics and distribution segment of which the distribution of the vaccine is expected to fall under is razor-thin, averaging at 0.5% over the past 20 quarters, ” the brokerage noted.
Pharmaniaga’s share price has risen sharply since the third quarter of last year, propelled by market-talk then that it would be selected to package the Covid-19 vaccine. This may have over-priced its near-term prospects.
Kenanga has an “underperform” rating on the stock with a target price of RM2.50.