PETALING JAYA: Earnings of healthcare companies in the second half of 2024 (2H24) are likely to come in as strong as posted in 1H24.
Affin Hwang Investment Bank Research said healthcare companies under its coverage registered strong second quarter (2Q24) earnings, which were primarily driven by the hospital operators.
“We view the recent results positively, as an indication of the sector’s resiliency in earnings delivery and see limited risks in our earnings growth estimates.
“We expect 2H24 to see similar strength (if not more) when compared to 1H24 as there is a lesser seasonality impact from festivities in the latter,” said the research firm.
According to Affin Hwang, the hospital market in Malaysia is likely to grow at an annual growth rate of 5.95% from 2024 to 2029.
It said both IHH Healthcare Bhd
and KPJ Healthcare Bhd are well on track to exceed such expectations.
“We have penciled in strong earnings growth for hospital operators in financial year 2024 (FY24) at 21% to 29%, which we believe is achievable despite the recent foreign exchange (forex) movements.”
However, manufacturers such as UMediC Group Bhd (UMC) and Apex Healthcare Bhd may see some impact from forex fluctuations, given that certain average selling prices and costs are US dollar denominated.
On the other hand, hospital operators like IHH and KPJ are mostly shielded as the bulk of operational costs are denominated in the local currency.
“Notably for IHH, despite having a large foreign exposure, as we had already priced in a slight decline in contributions from its Singapore operations, which forms close to 50% of its core profit before tax (PBT) with a Singapore dollar-ringgit rate of 3.3 to one.
“Its Turkiye and India operations only form about 10% of its core PBT and its Turkiye operations will likely be supported by aggressive repricing efforts amidst the hyperinflationary economy.”
Affin Hwang is maintaining an “overweight” rating on the healthcare sector. Its top stock pick remains IHH given the ongoing earnings growth coupled with undemanding valuations.
“IHH’s 1H24 core net profit of RM839.8mil formed 51% of our full-year estimate (and 46% of consensus).
“We deem the results within expectations as 2H24 is likely to register resilient earnings momentum.
“The quarter saw a quarter-on-quarter improvement in revenue, driven by improvements in inpatient volumes, particularly from Singapore, Malaysia and India.”
It said following inpatient demand, IHH is looking to add about 4,000 beds over the next four years – representing about 33% of its total existing bed count.
“A notable development to look out for in the near term is the proposed bid for Island Hospital.
“Pending further details on the acquisition price, we gather that the price tag may be worth over RM4bil,” it noted, while reiterating its “buy” rating on IHH with a higher target price of RM8.30 a share.Coming to KPJ, its management is looking to halve the losses generated by its five hospitals under gestation period, from RM137mil back in 2023.
“We believe this goal is well on track to be achieved given that the Damansara Specialist Hospital 2, which contributes to the bulk of the losses, has already reduced its losses by half.
“In terms of its expansion plans, KPJ targets to increase its operating bed capacity by over 30% to reach around 5,000 beds by 2028 (from 3,700 currently) from its existing hospital portfolio.”
As for UMC, its production capacity is expected to increase to 7.2 million per year in 4Q24, from 5.4 million per year currently.
Given the ongoing healthy sales momentum, the research firm said the plant can achieve optimal utilisation rates of over 80% by 2Q25.
On the other end, Affin Hwang sees lacklustre earnings momentum for Apex in the near term.
“We expect 2024 to register a decline in earnings year-on-year from the anticipation of lower sales coming off a high base back in FY22, which benefited from strong post-Covid demand, coupled with lower associate contributions post-stake divestment.
“In terms of its manufacturing arm, Apex’s existing production capacity for both solids and liquids should have sufficient room to cater to stronger demand in the near term as utilisation rates hover between 57% and 60% which is well below the benchmark rate indicating the need for an expansion.
“This is typically when utilisation rates consistently hover above the 75% rate,” the research house concluded.
