UOBKH Research said sentiment around hospital stocks is likely to remain cautious until there is more clarity.
PETALING JAYA: Listed private hospital stocks are likely to underperform due to policy overhang, amid elevated valuations.
According to UOB Kay Hian (UOBKH) Research, the policy overhang relates to the expected shift from the existing fee-for-service payment system to the diagnosis-related groups (DRG) payment system, where private hospitals receive a fixed amount based on the complexity of a case rather than itemised charges.
In a note, the research house said sentiment around hospital stocks is likely to remain cautious until there is more clarity.
UOBKH Research pointed to Thailand’s introduction of price ceilings on a range of medical services in 2019 as a relevant precedent.
“The three largest Thailand private hospitals’ 2023 operating margins grew 2.2 percentage points versus before the policy was implemented.
“During the year of implementation, margins only declined by 0.3% year-on-year to 26.5%.
“While it is a very simplistic comparison, there are similar parallels in terms of increased regulation and limits to free market forces in Malaysia,” it noted.
However, UOBKH Research said fears over the DRG system’s implementation in Malaysia may be “overblown”.
“We acknowledge that investors could remain on the sidelines.
“This is as they await further policy visibility and assess the impact on private hospitals,” it added.
The DRG system is being considered as a way to keep medical inflation in check, following public outcry over steep adjustments of 40% to 70% in medical insurance premiums.
The Health Ministry’s announcement on the potential introduction of the DRG system caused pre-emptive knee-jerk selling in KPJ Healthcare Bhd
and IHH Healthcare Bhd, which both dipped by an average of 6.5%.
Both stocks have since rebounded by 3.4%.
“The hospital segment’s earnings growth outlook of 7.6% for 2025 appears decent, but hospitals trade at an average one-year forward price-to-earnings ratio of 30.7 times, above their regional peers.
“The premium valuations appear to be pricing in both IHH’s and KPJ’s switch to a more brownfield focus, which is a structural positive for margins,” UOBKH Research noted.
It stated that the sub-sector is expected to underperform due to the policy overhang and the anticipated shift towards a risk-on environment.
“As hospitals are heavyweights in the sector, the segment anchors our ‘market weight’ rating on the healthcare sector,” it stressed.
The research house highlighted Alpha IVF Group Bhd and Duopharma Biotech Bhd as its top picks within the larger healthcare sector.
According to UOBKH Research, these companies offer more appealing opportunities that have yet to be fully reflected in their valuations.
It said Alpha IVF is undertaking exciting regional expansion, while Duopharma is expected to see a sharp recovery driven by lower input costs in 2025.
