Mixed fitness level of healthcare stocks

The fortunes of the local healthcare index’s 16 companies have been mixed in the last 12 months


The recent Bursa Malaysia Bhd revamp saw the introduction of the FTSE Bursa Malaysia (FBM) Kuala Lumpur Healthcare Index. The index comprises 16 companies with a total market capitalisation of RM3.26 billion.

The largest company in the group is IHH Healthcare Bhd at RM42.05 billion with Peterlabs Holdings Bhd being the smallest at RM60.13 million.

On it’s 11th day since the reclassification, Bursa’s healthcare index is down 13.98 points to close at 1,313.56 points on Monday, slightly lower than benchmark FBM Kuala Lumpur Composite Index (FBM KLCI). The index reached a high of 1,349.39 on Oct 1, 2018.

The fortunes of healthcare companies have been mixed in the last 12 months. Some counters had lost between 2% and 30% of their market value. A few, however, had clocked gains of between 15% and 70%.

Apex Setting the Tone

In the last 52 weeks, pharmaceutical company Apex Healthcare Bhd’s share price had jumped about 72%. Its market capitalisation doubled to about RM1.01 billion as of Monday and it’s the only pharmaceutical company which has an over RM1 billion market capitalisation.

This year alone the stock had improved 55%. It was trading at RM8.60 a share on Monday compared to RM5 a share in the same period last year. The share was traded at RM8.50 yesterday, giving the pharmaceutical company a market value of RM998.5 million.

Apex Healthcare currently trades at 19.6 times trailing 12-month earnings per share and 20 times its estimates for the coming year.

Affin Hwang Capital Research in a research note expects the generic pharmaceutical producers will benefit from the deliberate policies related to the healthcare sector.

The research house said Apex Healthcare could raise its average selling price in the fourth quarter of 2018 (4Q18) depending on market conditions post the Sales and Services Tax.

The pharmaceutical sub-industry is expected to benefit from potential changes in the healthcare sector, such as the proposed roll-out of the Peduli Sihat Health Scheme nationwide, liberalisation of the Health Ministry’s pharmaceutical procurements, and revisions of consultation fees for standalone private clinics, according to an investment banker.

Apex Healthcare manufactures and distributes pharmaceutical products, such as over-the-counter consumer healthcare products, diagnostics and surgical supplies to hospitals, clinics, independent and chain pharmacies, as well as supermarkets and health stores.

Besides Malaysia, the group has direct operations in Singapore, Vietnam and Myanmar.

For the first half of 2018, Apex Healthcare’s net profit was up 31.84% to RM26.88 million, or 22.95 sen per share, compared to RM20.39 million, or 17.4 sen per share, last year.

Its revenue stood at RM324.35 million, 4.64% higher, from RM309.95 million a year ago.

Making A Comeback

A healthcare company that had posted a strong share price rise in the last one year is CCM Duopharma Biotech Bhd. The pioneer of halal accredited health and wellness products had seen its share price surging about 27% to RM1.20 compared to 94 sen last year.

CCM Duopharma has a market capitalisation of RM794.26 million. This year alone, the share price has improved by 13%. For the 2Q ended ended June 30, 2018, its net profit rose 7.1% to RM10.34 million from RM9.65 million a year ago, on higher demand from the private and public health sectors.

Quarterly revenue rose 5.9% to RM123.99 million against RM117.05 million a year ago.

Third-Best Performer

Hovid Bhd is the third-best performer based on share price in the last 52 weeks.

It has been on the spotlight following its takeover offer. Its share price rose more than 15% to close at 37 sen a piece compared to 31 sen a year ago.

It’s market value improved from RM258.58 million to RM301.52 million as of Monday.

Hovid MD David Ho Sue San and Fajar Astoria Sdn Bhd, who have jointly launched a bid to take the company private, wants to withdraw the group’s listing status.

On Sept 14, 2018, Hovid announced to the stock exchange that Fajar Astoria and Ho intend to undertake a conditional voluntary takeover offer at 38 sen per share, acquiring 173.1 million shares or 20.95% stake that they do not own.

The duo collectively holds 79.05% stake in the Perak-based pharmaceutical firm after a takeover bid was launched in October last year at 38 sen per share.

However, they did not manage to garner the required 90% acceptance level that would have allowed a compulsory share acquisition.

Hovid’s share price movement has been volatile. The stock rose 9% in the past month, but returned a negative 2.7% so far this year.

Unhealthy Stocks

IHH may be the largest healthcare stock in terms of market capitalisation. However, in terms of share price movement, it has been among the laggards. The company, however, saw over RM10 billion of its market capitalisation evaporated in the last 12 months.

The world’s second-largest hospital group was trading at RM5.29 yesterday, compared to a 52-week high of RM6.42. The group operates 49 hospitals and 30 medical centres around the world.

Its shares have been under pressure in most months this year. It returned a negative 9.1% so far this year. Recently, its indirect wholly owned subsidiary Pantai Hospitals Sdn Bhd acquired the entire stake in Amanjaya Specialist Centre Sdn Bhd for RM101.66 million.

Analysts said besides the start-up costs of new hospitals, the company must address another variable — the severely weakened Turkish lira.

A report by Affin Hwang highlighted IHH’s outlook in Turkey that might see it experiencing sustained losses in ringgit terms due to the sharp depreciation of the lira.

“This is due to the mismatch between the funding currency of its debt in euro, the US dollar and operational currency of lira,” it said.

Despite Affin Hwang having maintained its ‘Buy’ rating on the stock, IHH shares tumbled to the lowest levels in almost four years after the report hit investors.

Affin Hwang, however, said the fluctuations in its share price do not change IHH’s position as one of the main healthcare players in the industry.

Another company which has seen a swing in fortune is Pharmaniaga Bhd. The new Pakatan Harapan government’s decision to review all concession agreements for medical supplies saw Pharmaniaga shares tumbling to its five-year low.

The government is reviewing all existing medical supplies concession agreements to government hospitals, including the 10-year contract awarded to Pharmaniaga which will end in November 2019.

The company, used to be valued at RM1.37 billion, is now worth about RM726 million based on market capitalisation. The stock had dropped about 4% in the past month, losing 36% of its value this year alone.

CIMB Research said Pharmaniaga has held the exclusive rights since 1994 under a concession agreement. As of financial year ended Dec 31, 2017, revenue from the concession agreement made up 49% of Pharmaniaga’s total revenue of RM2.3 billion.

Mixed Analysts Reviews

Analysts reckoned that the healthcare sector earnings growth is expected to be unexciting and pricey.

Kenanga Investment Bank Bhd, which maintained its ‘Underweight’ rating on the healthcare sector, expects the sector to deliver a “dull earnings growth”.

“All in, healthcare stocks under our coverage are already trading at rich price earnings ratio valuations in contrast to their expected low-teens earnings growth,” the research arm said in a note.

MIDF Research said Malaysia’s public healthcare spending is among the lowest in the region.

“Malaysia’s public spending on healthcare as a percentage of GDP had breached the 4% level since 2015, with the current rate at about 4.4%, and it is still one of the lowest in the region.

“To put things into perspective, Malaysia’s neighbouring emerging economies such as Cambodia and the Philippines recorded higher healthcare expenditure as a percentage of GDP at a rate close to 6% of their GDP,” MIDF added.

According to the benchmark set by World Health Organisation, public spending on healthcare is recommended at 7% as a percentage of GDP.

However, MIDF maintained a positive stance over the sector encouraged by the development of the digital healthcare services which is expected to contribute positively to the demand.

“This is because, as we believe, digital healthcare will increase efficiency in healthcare services; provide quality and personalised healthcare services to patients; and bring greater accessibility to healthcare services for patients in the suburban areas,” the research house said.

Affin Hwang said the healthcare sector is set to benefit from the new government’s higher expenditure.

“The new government in its election manifesto aimed to elevate health expenditure from 4% GDP to up to 6%-7% of GDP.

“Increased allocation represents a 50%-75% surge in healthcare expenditure, but the source of funding appears uncertain at this juncture,” it said.

Affin Hwang added that based on deliberated policy changes, it is possible that the middle 40% income group and top 20% income group may pay more for outpatient treatment, while the bottom 40% income group appears to be subsidised by the government.

“More importantly, we examine and identify the impact of three prominently deliberated healthcare policies: i) Peduli Sihat nationwide implementation; ii) tripling of stand-alone private clinic consultation fees; and iii) monopoly break-up of pharmaceutical concession.

“While the generic pharmaceutical producers are the most likely to benefit, the sheer size of an expanded healthcare expenditure should well catalyse the sector,” it added.