KUCHING: Malaysia’s healthcare sector continues to suffer from bloated valuations as sector players report pedestrian earnings despite expensive valuations.
In a sectoral update, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) highlighted that the furst quarter of 2017 (1Q17) results season had seen most major healthcare players struggling to meet expectations.
IHH Healthcare Bhd (IHH) came in below expectations while KPJ Healthcare Bhd (KPJ) and Pharmaniaga Bhd (Pharmaniaga) barely came in within expectations.
“IHH continued to be dragged down by pre-operating and start-up costs from the Gleneagles Hong Kong Hospital and Acibadem Altunizade (IHH’s Turkey hospital asset) while Pharmaniaga returned to the black in 1Q17 underpinned the recovering logistics division which was in the red in 4Q16,” the research arm shared.
IHH in particular is expected to continue to be de-rated and weighed down by market-to-market volatility on translation of non-Turkish Lira borrowings.
In the short-term the group’s earnings will see no reprieve but in the medium-term growth drivers will come from its expansion projects – Pantai Hospital Ayer Keroh, Pantai Hospital Klang and Pantai Kuala Lumpur – and its green field projects 0 Gleneagles Medini and Acibadem Altunizade.
For Pharmaniaga, earnings are expected to see bleak sequential growth in subsequent quarters in anticipation of volatile off-take and potential higher operating expenses.
“Additionally, the roll-out of Pharmacy Information System (PhIS) is expected to continue to dampen bottom-line over the short-term but over the longer-term, we expect its manufacturing operations to proper earnings,” added the research arm.
For KPJ, the group has continued to post average earnings for the past two years and is expected to be unexciting for the next few years as earnings from its greenfield and brownfield projects will only be starting by the end of 2017.
All in, the research arm notes that all stocks under their coverage are currently trading at rich price earnings ratio (PER) valuation in contrast to their expected low-teens earnings growth.
“We believe their growth potentials are already reflected in the valuation. The main drawback at this juncture is that healthcare stocks including IHH and KPJ are trading at rich valuations while offering low dividend yields.”
Despite the bloated valuations however, on the whole the healthcare sector is seeing robust inpatient growth as it continues to be supported by an ageing population.
Based on industry estimates, it is expected that the population aged 65 years and above will reach 7.1 per cent by 2021, which would effectively classify Malaysia as an aging population society based on United Nations’ definition.
“Population for the age group 0 to14 years is projected to decline from 27.4 to 19.6 per cent for the same period.
“However, the population for the age group 15 to 64 years and 65 years and over is expected to increase by 1.4 and 6.4 percentage points, respectively, for the same period,” reported the research arm.
This shift in population demographics is attributed mainly to advances in medical technology, higher persona wealth and growing awareness of the importance of healthcare and disease prevention.