Private healthcare sector earnings expected to contract this year

PETALING JAYA: The private healthcare sector is expected to see its earnings contract this year, despite the global health crisis brought on by the Covid-19 pandemic which has seen a surge in demand for healthcare services.

In a note, AmInvestment Bank Research said the virus outbreak is expected to negatively impact the hospitals’ inpatient and outpatient volumes as medical tourists decline and non-essential cases are deferred.

As such, it expects KPJ Healthcare’s Y20 earnings to slip by 7% with net margins slipping 0.7 percentage points to 5.1%. Likewise, IHH Healthcare Bhd’s earnings is projected to decline 13%, with a one percentage point contraction in net margins to 5.2% this year.

“Medical tourists made up roughly 3% of KPJ’s revenue and 15% of IHH’s revenue (6% Malaysia, 26% Singapore, 16% Turkey, 10% India).

“We believe IHH’s bigger exposure to medical tourism means that it will face a bigger impact due to the travel bans compared with KPJ. We expect margins to be pressured for both groups as patients delay non-essential case,” it said.

As such, the research house believes 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.

Currently, both hospitals are not taking in Covid-19 patients in Malaysia. They are however, offering Covid-19 tests, but the income impact to both groups are expected to be minimal.

KPJ offers Covid-19 tests through 12 of its hospitals while its subsidiary, Lablink (M) Sdn Bhdnow runs around the clock to speed up the process of providing the results.

“As a result, the group was able to lower the price of the test kits to RM388 starting April 3, from roughly RM600 previously. Considering that Lablink only contributes less than 5% to the group’s revenue and the lower pricing of the test kits, we expect its impact to the group’s margins is minimal,” said AmResearch.

For IHH, its Covid-19 tests in Malaysia are offered at a higher price of around RM950 with its wholly owned subsidiary Pantai Premier Pathology running about 500 tests a 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 contribute around 15– 20% to IHH’s top line,” said the research house.

AmResearch is maintaining its buy call on KPJ Healthcare with a lower fair value of RM1.15, from RM1.18 previously. It is upgrading IHH to buy, from hold, with a lower fair value of RM5.91 from RM6.06 previously.

Meanwhile, Maybank IB Research said the second quarter of the year could be the worst for IHH wth the travel bans/lockdowns being imposed at its key markets.

The research house cut its FY20 earnings per share forecast by 17% due to lower patient volume.

However, it is maintaining a buy call for IHH or its relative resiliency against a potential slower global economy with a reduced target price of RM6.05.

As for KPJ, Maybank Research said its share price has been relatively resilient and advocates investors to buy n dips in the event of a selldown.

“1H20 earnings could be hit by Covid-19 and the movement control order. We cut our FY20E EPS by 16% to impute for the Covid-19 impact,” it said.

In early-March, KPJ’s bed occupancy rate was already lower at about 60% as patients avoided hospitals, which was further exacerbated by the one-month MCO.

During the first week of MCO, KPJ’s occupancy rate plunged to around 30% as only urgent surgeries were being undertaken.

The research house has a buy call on KPJ, with a lowered target price of RM1.

The Covid-19 is expected to negatively impact the hospitals’ inpatient and outpatient volumes as medical tourists decline and non-essential cases are deferred. – BERNAMAPIX

source https://www.thesundaily.my/business/private-healthcare-sector-earnings-expected-to-contract-this-year-IX2231129