PETALING JAYA: Healthcare stocks are trading at palatable valuations, but their prospects do not appear especially compelling, says UOB Kay Hian (UOBKH) Research.
The research firm, which maintains a “market weight” call on the sector, said 2023’s growth will be underpinned by further recovery in patient volume amid minimal Covid-19-related contributions.
The reopening of China’s borders, according to the research firm, will likely not have a significant impact as China medical tourists account for less than 5% of foreign medical patients.
It expects healthcare allocation under the new budget, due on Feb 24, to be largely intact. However, this is unlikely to shift investor sentiment significantly.
In the Budget 2023 that was tabled in October 2022, the then-government had allocated RM36.1bil (from RM32.4bil in 2022) to the Health Ministry.
“The public sector allocation for 2022 represents 2.6% of gross domestic product.
“However, it is below the average of 4% for middle-income countries and 5%-6% below the recommendation by the World Health Organisation. Based on this, we expect the healthcare allocation for the public sector to be largely intact under the upcoming Budget 2023,” said UOBKH in a healthcare sector report.
It said that while China’s reopening is insignificant to medical tourism, funding to the Malaysia Healthcare Travel Council (MHTC) should benefit the likes of KPJ Healthcare Bhd
and IHH Healthcare Bhd.
On another note, it said pharmaceutical companies are hoping for a re-tender on consumables supplied to the government.
The research firm said it gathered that terms to the existing approved products purchase list contracts were last determined in 2017 when the ringgit exchange rate to the US dollar was at 4.20. This has not been adjusted for the inflationary cost.
Its pick in the sector is KPJ for its intention to divest its long-standing loss-making regional operations. Meanwhile, the group’s mainstay operations are turning better.
Given KPJ’s positive operating leverage, it added that the group’s earnings should grow 28.5% in 2023.
Its other sector pick is Duopharma Biotech Bhd. The research firm expects Duopharma’s insulin contract with the government, which faced supply issues last year, to see improved contract fulfillment in 2023 with the resumption of the global supply chain.
“The contract is worth RM125mil per annum or 15% of 2023’s revenue. It is among the key primary growth drivers for Duopharma’s 2023 earnings following the easing of Duopharma’s consumer healthcare sales that were previously fuelled by the pandemic,” said UOBKH.
Duopharma has also fully written down its Covid-19 vaccine inventory in 2022.
Furthermore, there could potentially be approval of its Alzheimer drug through Bostin-based AZTherapies Inc in which Duopharma has a 1.3% stake.
