Coronavirus to hit healthcare sector’s earnings

By SHAHEERA AZNAM SHAH / Pic TMR

THE healthcare sector’s long-term fundamentals are positive with rising ageing population, increasing life expectancy and influence of good medical care, said AmBank Research.

Thus, the research house has upgraded its recommendation for the private healthcare sector to ‘Overweight’ from ‘Neutral’.

“The local private healthcare sector has an added catalyst, such as medical tourism, backed by its highly competitive charges and hospitalisation costs, a generally English-speaking population and various incentives provided by the government,” it said in a research report yesterday.

AmBank Research, however, anticipates a contraction in the sec- tor’s earnings in 2020 due to the Covid-19 pandemic which will significantly impact the sector in the short term.

“The Covid-19 pandemic is expected to negatively impact hospitals’ inpatient and outpatient volumes as medical tourists decline and non-essential cases are deferred,” it said.

The research house said the earnings recovery is expected to kick in in 2021.

AmBank Research expects KPJ Healthcare Bhd’s earnings in its financial year 2020 (FY20) to slip by 7% and recover in FY21 with an 11% growth in earnings.

“In terms of net margin, we believe it will slide by roughly 0.7 percentage point (ppt) to 5.1% in FY20,” it said.

For IHH Healthcare Bhd, AmBank Research expects the group’s earnings in FY20 to decline by 13% and recover in FY21 with 45% growth in earnings.

“In terms of net margin, we believe it will contract by one ppt in FY20 to 5.2%.

“We believe the valuations for both KPJ and IHH are now attractive as their share prices have dropped around 8.3% and 9.7% year-to-date respectively,” the research outfit stated in a report yesterday.

The research house said the Covid-19 testing, which is being offered in Malaysia, Singapore, Turkey and India, will slightly alleviate the pressure on IHH’s margins, given the higher price point and availability throughout different regions.

“KPJ and IHH are offering private Covid-19 tests in Malaysia. KPJ offers Covid-19 tests through 12 of its hospitals and has also made it compulsory for its patients to go through Covid-19 screening upon admission to seven of its hospitals.

“The group has recently scaled up its testing capacity from 150 in the beginning to around one million tests per day.

“As a result, the group was able to lower the price of the test kits to RM388 starting April 3, 2020 from roughly RM600 previously,” it said.

AmBank Research said IHH’s Covid-19 tests in Malaysia are offered at a higher price of around RM950 as the group’s wholly-owned subsidiary, Pantai Premier Pathology, has the capacity to run 500 Covid-19 tests per day.

“Contribution from Pantai Premier Pathology is also less than 5% to the group’s revenue, whereas the group’s diagnostic arm across all regions contributes around 15% to 20% to IHH’s top line,” it said.

The research house upgraded its recommendation for IHH to ‘Buy’ from ‘Hold’, while maintaining its ‘Buy’ call on KPJ.