Healthcare - Defensive in earnings but rich in its valuations

We believe the healthcare industry in Malaysia is expected to continue to see stable growth supported by a growing healthcare expenditure, rising medical insurance and aging population demographics. The healthcare services sector earnings are considered defensive as it is stable and highly predictable as well as having a captive earnings stream. However, healthcare stocks like KPJ Healthcare (“KPJ”, Not Rated) and IHH Healthcare (“IHH”, Not Rated) are now trading at rich valuations and offer only low dividend yields at their current market prices. 

Budget 2013 an impetus for growth in the Healthcare industry.  The Government has allocated RM19.3b (+15% y-o-y) for healthcare management and development services in 2013. The launching of 1Malaysia clinics has received overwhelming response and benefited local communities in reducing treatment cost and facilitating health services access to treatment. The Government will allocate RM20m for additional 70 new 1Malaysia clinics in 2013. 1Malaysia clinics will now also provide blood test services, which include cholesterol and glucose tests as well as urine tests. In addition, RM100m has been allocated to upgrade 350 clinics nationwide as well as to provide additional 150 dialysis machines in Government haemodialysis centres across the country. 

Shortage of beds in Singapore and Malaysia a boon to healthcare players. Amplifying the demand for beds over the next few years in Singapore and Malaysia is the shortfall of beds and high-occupancy rates of an average 85%. In terms of bed capacity, Singapore has a relatively low total hospital bed ratio of 2.2 per 1,000 population in 2010. Despite the Singapore government’s effort in increasing the bed capacity of public hospitals through expansions and new developments, public hospitals are still unable to cater to the rising demand for hospital beds. In Malaysia, the number of beds per 1,000 population was at 1.94 in 2010, which is lower than OECD’s average of 3.1. 

IHH. While we have yet to initiate coverage on IHH, we like the medical group for its exposure to a network of healthcare jewels with a commanding market position in Singapore, Malaysia and Turkey. Based on the consensus forecast, IHH is trading at 47.0x and 36.0x FY12 and FY13 EPS compared to an average net profit growth of 30% p.a. over the next two years. IHH’s growth driver in the next five years will come from a pipeline of new beds to be delivered through new hospital developments and expansion of existing facilities. In Singapore, the first phase of Mount Elizabeth Novena Hospital comprising 150 of 333 beds (all single-bed rooms) capacity and 13 operating theatres has commenced operations in July 2012. The remainder in the second phase is projected to be operational in 2H2013. In Malaysia, PPL is currently undertaking expansion projects in four hospitals, Gleneagles Medical Centre Penang, Pantai Hospital Kuala Lumpur, Pantai Hospital Klang and Gleneagles. The three greenfield projects, namely Gleneagles Kota Kinabalu, Pantai Hospital Manjung and Gleneagles Medini will add an estimated 500 beds to its network by 2014. In Turkey, Acibadem is currently undertaking expansion projects in two hospitals, Acibadem Sistina Skopje Clinical Hospital and Acibadem Maslak Hospital. The two greenfield development projects are Acibadem Ankara Hospital and Acibadem Bodrum Hospital. All in, Acibadem plans to add 726 beds by 2014.  

KPJ. We are positive on KPJ’s long term prospects, asset-light business model and defensive earnings quality. However, the stock’s growth trajectory could have reflected in its price. Based on the consensus forecast, the stock is trading at 25.0x FY12 and 21.0x FY13 EPS, which appears fully valued as compared to its average net profit growth rate of 15% p.a. over the next two years. Looking ahead, the earnings contribution over the next two years is expected to come from the building of new hospitals as well as expanding its existing capacity and services. The planned capex is estimated between RM150m and RM200m p.a. For its immediate plan, a new hospital in Muar (120 beds) and another in Bandar Datuk Onn, Johor Bahru (400 beds) are targeted to be operational by 2013 and 2014 respectively. Over the longer term, KPJ plans to build a new hospital each in Perlis and Pahang (Tanjung Lumpur), as well as one hospital in Terengganu and Melaka. Other new and expansion of its existing hospitals include KPJ Sabah Hospital, Pasir Gudang Specialist Hospital and Maharani Specialist. Its recently acquired Bangkok hospital is expected to help contribute to KPJ’s bottom-line but the impact will not be significant.

Source: Kenanga