PHARMA (7081) : Healthcare - overall - Pick the right remedy
Recommendation: Over Weight
Despite some pullbacks last month, the share prices of healthcare stocks in our portfolio still beat the market by 12% on average in 2014. This year, investors should pick stocks that will benefit the most from rising healthcare demand yet insulated from cost pressure due to GST. We remain Overweight on the sector, with Pharmaniaga as our top pick. We also upgrade Hovid to Add. Strong revenue and earnings growth are the potential re-rating catalysts.
We remain Overweight on the sector, with Pharmaniaga as our top pick. We also upgrade Hovid to Add. Strong revenue and earnings growth are the potential re-rating catalysts.
2014 in review
The companies in our portfolio recorded an average growth of 32% in net profit and 12% in revenue in 9M14, thanks to stronger demand and execution of aggressive expansion plans. Their share prices began to rally in 2Q following good earnings and stable topline growth. However, some of the gains were reversed during the broader market selldown in 4Q. IHH, Pharmaniaga, Hovid, and KPJ outperformed the market by 1-31%.
Outlook for 2015
We think that three key factors will drive healthcare revenue and earnings this year. First, the long-term trend of rising healthcare needs should continue due to the ageing population. The Department of Statistics estimates that the number of people aged 65 or above will rise by 4.7% in 2015 alone, which is positive for healthcare demand. Second, the weaker ringgit will affect the earnings of healthcare companies as they are exposed to either overseas operations or export markets. Hovid is the biggest beneficiary if the ringgit weakness persists since it derives more than half of their revenue from outside Malaysia. Third, the impact of GST implementation must not be overlooked. GST is likely to increase the operating cost of the healthcare companies while impairing purchasing power, particularly for the middle class who may be deterred from spending on private healthcare. Private hospitals that target this income segment may find it harder to attract patients and pass through their operating costs. Overall, we think that Hovid will be the net winner in a weak ringgit environment as the higher revenue will more than offset the impact of GST on operating costs. KPJ could be at a disadvantage as it targets mainly the middle class and its overseas operations are not profitable.
Watch the valuation drivers
IHH and KPJ currently trade at 34-38x CY16 P/E, significantly higher than the market’s 15x and the pharmaceutical sector’s 14x. While the high valuation premiums for hospitals are still justified given their strong long-term earnings growth prospects, their valuations are sensitive to changes in cost of equity. A slight rise in cost of equity would reduce the valuations significantly. As such, we prefer pharmaceutical stocks for exposure to the sector.
Source: CIMB Daybreak - 06 January 2015
Recommendation: Over Weight
Despite some pullbacks last month, the share prices of healthcare stocks in our portfolio still beat the market by 12% on average in 2014. This year, investors should pick stocks that will benefit the most from rising healthcare demand yet insulated from cost pressure due to GST. We remain Overweight on the sector, with Pharmaniaga as our top pick. We also upgrade Hovid to Add. Strong revenue and earnings growth are the potential re-rating catalysts.
We remain Overweight on the sector, with Pharmaniaga as our top pick. We also upgrade Hovid to Add. Strong revenue and earnings growth are the potential re-rating catalysts.
2014 in review
The companies in our portfolio recorded an average growth of 32% in net profit and 12% in revenue in 9M14, thanks to stronger demand and execution of aggressive expansion plans. Their share prices began to rally in 2Q following good earnings and stable topline growth. However, some of the gains were reversed during the broader market selldown in 4Q. IHH, Pharmaniaga, Hovid, and KPJ outperformed the market by 1-31%.
Outlook for 2015
We think that three key factors will drive healthcare revenue and earnings this year. First, the long-term trend of rising healthcare needs should continue due to the ageing population. The Department of Statistics estimates that the number of people aged 65 or above will rise by 4.7% in 2015 alone, which is positive for healthcare demand. Second, the weaker ringgit will affect the earnings of healthcare companies as they are exposed to either overseas operations or export markets. Hovid is the biggest beneficiary if the ringgit weakness persists since it derives more than half of their revenue from outside Malaysia. Third, the impact of GST implementation must not be overlooked. GST is likely to increase the operating cost of the healthcare companies while impairing purchasing power, particularly for the middle class who may be deterred from spending on private healthcare. Private hospitals that target this income segment may find it harder to attract patients and pass through their operating costs. Overall, we think that Hovid will be the net winner in a weak ringgit environment as the higher revenue will more than offset the impact of GST on operating costs. KPJ could be at a disadvantage as it targets mainly the middle class and its overseas operations are not profitable.
Watch the valuation drivers
IHH and KPJ currently trade at 34-38x CY16 P/E, significantly higher than the market’s 15x and the pharmaceutical sector’s 14x. While the high valuation premiums for hospitals are still justified given their strong long-term earnings growth prospects, their valuations are sensitive to changes in cost of equity. A slight rise in cost of equity would reduce the valuations significantly. As such, we prefer pharmaceutical stocks for exposure to the sector.
Source: CIMB Daybreak - 06 January 2015
