Flat 2019 outlook for healthcare amid expensive valuations

A mixed bag of results seen in the healthcare segment in 3Q18 shows a dull earnings growth outlook for 2019


The healthcare sector is expected to see flat earnings growth going forward capped by expensive valuations, according to Kenanga Research.

In a recent note, the research house said it is maintaining its ‘Underweight’ rating on the healthcare segment, which it anticipates to be “dull in terms of earnings growth” following a mixed bag of results seen in the third quarter of 2018 (3Q18).

IHH Healthcare Bhd’s 3Q18 earnings came in above expectations due to a low base effect in 2017, while Pharmaniaga Bhd and KPJ Healthcare Bhd came in within expectations.

“Over the longer term, growth is expected to be supported by an ageing population and growing awareness of healthcare maintenance and disease prevention,” the research firm said.

Kenanga Research also said Malaysia’s population aged 65 and above will constitute 7.1% of the total population by 2021, which will categorise the country as an ageing society as per the United Nations’ (UN) definition. According to the UN, an ageing society is made up of 7% of people aged 65 and over.

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

The research house added that IHH Healthcare, which met expectations in 3Q18 after five consecutive quarters of disappointment, is projected to face higher operating costs in the short to medium term arising from wage inflation due to greater competition for trained personnel and start-up costs on pre-opening of hospitals.

“The group will also continue to see foreign-exchange translation losses on its balance sheet and income statement in light of continued volatility in the Turkish lira, which would impact its Turkish operations at Acibadem Altunizade Hospital,” it said.

Pharmaniaga’s future remains clouded by uncertainty in its concession renewal, as the government is currently reviewing all medical supplies concession agreements among which the group has a 10-year contract ending in November 2019.

“We are uncertain of the renewability of the contract, but Pharmaniaga has the track record, platform and systems in place for the distributions of medical supplies,” Kenanga Research said.

Meanwhile, KPJ Healthcare’s valuations appear to be attractive again, with earnings growth to come from narrower losses and profitability from hospitals built two to three years ago.

Kenanga Research noted that the healthcare operator is confident that start-up costs from new openings will be absorbed by incremental ramp-ups from earlier openings and steady contributions from matured hospitals.

“The stock is currently trading at 15% and 40% discount compared to its historical average of 28 times and regional peers of 35 times respectively.

“The 40% discount to regional peers is wider compared to the historical average of 30%,” it added.