Kenanga Research has an “overweight” call on the healthcare sector.
PETALING JAYA: Private hospital operators like IHH Healthcare Bhd
and KPJ Healthcare Bhd continue to be favoured by Kenanga Research due to their market presence, pricing power and sustained demand.
The research house, which has an “overweight” call on the healthcare sector, noted that the companies posted solid financial results in the recent third quarter (3Q24) with higher revenues and yields on increased patient treatments.
The research house said the improved performance is likely to be sustained in the near future.
“IHH expects its earnings momentum to accelerate, underpinned by revenue intensity and rising demand in 4Q24. This would be supported by higher yield services both in Singapore, return of medical tourists to Acibadem Healthcare Group in Turkiye, and the post-election effect in India,” Kenanga Research stated in a sector report.
The stock is its top sector pick due to its share price underperforming peers and strong demand for services across its markets.
“We consider the under-performance unwarranted. IHH trades at 13 times enterprise value (EV) to its earnings before interest, taxes, depreciation and amortisation (Ebitda) discount compared with 20 times that Columbia Asia paid for Ramsay Sime Darby Health Care.
The valuation gap should narrow given IHH’s sheer size in terms of profitability and dominant market position in private healthcare and easing operational challenges regionally,” Kenanga Research said.
It has an “outperform” call and target price of RM8.11 a share on IHH and said the 22% rise in its share price year-to-date is below the 76% rise enjoyed by KPJ shares over the same period.
Although KPJ’s share price has run up significantly, Kenanga Research continues to like it for its pricing power as a private healthcare provider and strong market position locally with the largest network of 29 private hospitals.
KPJ aims to add beds to its hospital chain with total beds set to hit 4,100 by the end of this year and further rise to 5,000 over the next five years.
“In terms of bottom-line profitability, we expect earnings to gain momentum moving into 2025 on better operational efficiencies from its cost optimisation effort and overhead absorption rate as a result of a gradual ramp-up in opening new beds,” Kenanga Research noted, adding it has a target price of RM2.40 and “market perform” call for KPJ.
KPJ is also increasingly looking to medical tourism as an avenue to grow its income, it added.
Elsewhere, the financial performance of pharmaceutical concerns like healthcare supplement and drug makers such as Pharmaniaga Bhd and Nova Wellness Group Bhd in the 3Q24 fell short of Kenanga Research’s expectations.
Nevertheless, the research house said the sustained growth of the over the counter (OTC) pharmaceuticals market in the country make the companies and names like Kotra Industries Bhd, with a target price of RM5.35 and “outperform” rating, a viable investment case.
The research house has a target price of 39 sen and “market perform” rating for Pharmaniaga and a target price of 56 sen and “outperform” call on Nova Wellness.
Independent market researcher The Statista Consumer Market Outlook projects the OTC pharmaceuticals market in Malaysia to grow at a compound annual growth rate of 6% to an estimated RM3.2bil by 2027.
Kenanga Research believes Kotra, with its various household brands such as Appeton, Axcel and Vaxcel, is set to benefit from the sustained demand for OTCs.
“We also like Nova for its business model which encompasses the entire spectrum of value chain from product conceptualisation starting from research and development to manufacturing,” the research house added.
