Slight drop in healthcare companies’ 2Q earnings

KUALA LUMPUR: Healthcare companies generally experienced a slight sequential deterioration in their recently reported second-quarter 2022 earnings, says Kenanga Research.

The research house said companies operating in this space still see salient prospects moving forward on factors such as growing healthcare expenditure, rising medical insurance coverage and an ageing population demographic.

“There was a slight sequential deterioration seen in the recently concluded second-quarter results season, with 50% coming in within our expectations and 50% coming in below our forecasts,” it said.

IHH Healthcare Bhd is Kenanga Research’s top pick with an “outperform” call and a target price of RM7.20.

The research house said the company’s results for the cumulative first half of 2022 came in within expectations, driven by patient throughput, higher revenue intensity and recovery in demand for elective surgeries.

It said IHH’s first half earnings more than offset the second quarter hit from the Malaysian Financial Reporting Standards (MFRS) 129, which classifies Turkey as a hyper-inflationary economy attributable to higher depreciation.

“Note that as a result of the MFRS 129, the group’s property, plant and equipment carrying amount in Turkey were higher after reindexation.

“We also highlight that IHH’s list prices have been adjusted for inflation in the first quarter.

“However, due to the sustained high inflationary pressure, the group is reviewing a potential further price hike in the second half to realign with the corresponding cost increases,” Kenanga Research added.

Meanwhile, KPJ Healthcare Bhd’s first-half results disappointed Kenanga Research’s expectations as the rebound in patient throughput fell short.

“Its patient throughput will continue to normalise with the return of elective surgeries as the pandemic transits.

“We like KPJ for the inelastic demand of healthcare needs, allowing providers like KPJ to pass on higher costs amidst rising inflation and its largest hospital network locally,” it said.

However, Kenanga Research noted that KPJ is “unattractive” from the standpoint of equity investment over the short term, given that its new hospitals are still under an earnings-dilutive gestation period.

On Pharmaniaga Bhd, Kenanga Research said the group has strong earnings visibility, backed by its long-term medical supply concession with the Health Ministry (MoH) that helps anchor its dividend yield of circa 5% or more.

However, its appeal as a growth stock has diminished with the falling demand for the Covid-19 vaccine, it said.

“We expect Pharmaniaga earnings for the financial year 2022 to 2023 to be on a downtrend in the absence of lumpy vaccine sales.

“Nonetheless, the regular orders for medical supplies from the MoH concession will remain stable (as the concession is expected to be renewed end-2022),” it added.

Kenanga Research said Pharmaniaga may need to brace for a margin squeeze as the cost of inputs such as active pharmaceutical ingredients has skyrocketed in recent months.

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