KUCHING: The healthcare sector’s earnings growth is expected to be unexciting and further capped by expensive valuations, analysts say.
The research arm of Kenanga Investment Bank Bhd (Kenanga Research), which maintained its ‘underweight’ rating on the healthcare sector, expected it to be “dull in terms of earnings growth and further capped by expensive valuations”.
It added: “All in, healthcare stocks under our coverage are already trading at rich price earnings ratio (PER) valuations in contrast to their expected low-teens earnings growth.”
IHH Healthcare Bhd (IHH), one of the healthcare stocks under the research arm’s coverage, is expected by Kenanga Research to face higher operating costs arising from wage inflation over the short-to-medium term.
The research arm further highlighted that this is a result of increased competition for trained personnel and start-up costs on pre-opening of hospitals, including Gleneagles Hong Kong (GHK) which will put pressure on cost and margins.
“Since June 2018, the Turkish lira has depreciated significantly against the US dollar, euro and ringgit, with continued volatility in the currency.
“This will result in foreign exchange translation losses on the group’s balance sheet and income statement,” it said.
On Pharmaniaga Bhd (Pharmaniaga), Kenanga Research had concerns on the government reviewing all medical supplies concession agreements of 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.
“Its Indonesian operations remain a key area of growth, while further progress is being made in the European Union as the group seeks to expand its global presence.
“In tandem with this, the group is focused on implementing continuous cost optimisation measures across its operations.”
Over the longer term, the research arm expected Pharmaniaga’s manufacturing division to propel earnings growth.
“The group aims to add about 200 new products over the next 10 years to its existing portfolio of around 500 products, which should boost demand for its products and lift earnings.”
As for KPJ Healthcare Bhd (KPJ), Kenanga Research projected earnings growth to come from narrower losses and profitability for hospitals built two to three years ago including KPJ Klang, Rawang, Maharani, Pasir Gudang and Pahang.
It noted that KPJ Perlis (greenfield, 90 beds) has commenced operations in the second quarter of 2018 (2Q18).
Beyond 2018, the research arm expected brownfield development, including KPJ Ampang (149 new beds), KPJ Johor (40 new beds) and KPJ Seremban (90 new beds) to drive earnings beyond 2018 of which gestation periods are much shorter than greenfield development.
“Elsewhere, greenfield expansions include Kuching, Sri Manjung and KPJ Johor Bandar Dato Onn which are expected to start operating by 2Q19.
“The group 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.”