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Supply Chain Risk

Defensive, but valuations unhealthy within healthcare

The improvement has been attributed mainly to advances in medical technology, higher personal wealth and awareness of the importance of healthcare. — AFP photo

KUCHING: Growth in Malaysia’s healthcare sector continues to be supported by an ageing population, analysts say, but warn that company valuations within the sector may be lofty on uncertainties ahead.

Kenanga Investment Bank Bhd (Kenanga Research) estimated that for the 2010 to 2040 period, the Malaysian population of the over 65 age bracket is projected to increase more than three-fold.

The increase will lead Malaysia into becoming an ageing population nation in 2021 when the population aged 65 years and over reaches 7.1 per cent.

Based on the United Nations definition, an aging society is when the population aged 65 and over reaches seven per cent of the total population.

“Population for the age group zero to 14 years is projected to decline from 27.4 to 19.6 per cent for the same period,” it said in a sector analysis.

“However, the population for the age group 15 to 64 years and 65 years and over are expected to increase by 1.4 and 6.4 percentage points, respectively.

“Longer life spans have also resulted in a larger number of people aged 65 and above.

“This improvement has been attributed mainly to advances in medical technology, higher personal wealth and awareness of the importance of healthcare.”

Notably, IHH Healthcare Bhd ’s 2QFY20 earnings were impacted by lower contribution across the board as inpatient admission fell between 25 to 43 per cent in the group’s operating units including Singapore, Malaysia, India and Turkey where Acibadem losses widened.

“With the re-opening of economies, the group expect subsequent quarters to show marked improvement,” it added.

“The group has undertaken cost initiatives measures to defer non-essential capex and opex to mitigate any short-term revenue shortfall.

“Due to the Covid-19 pandemic, the opening of Parkway Shanghai has been postponed to 2021.

“Thus far, the group has further deleveraged its non-lira debt in its Turkish operations from 267 million to 180 million euros as at June 2020.

“Looking at performance of IHH’s 62 per cent-owned Continental Hospitals and 74 per cent-owned Global Hospitals acquired in 2015 where their EBITDAs are hardly positive, India is seen as a tough operating environment for IHH.

“We are also concerned over issues at Fortis, including an auditor’s qualified audit report in FY19, potential risk of provisions, lapses in internal controls leading to regulatory probing, which could well mean execution risk.”

Another player, Pharmaniaga Bhd (Pharmaniaga) might face cloudy earnings visibility beyond December 2021 as its supply concession ceases.

This comes as its share price has risen sharply since July on talks that Pharmaniaga will be selected to package the Covid-19 vaccine once it is developed.

“However, we caution that such talks are premature and even if selected, there may be multiple packagers of the vaccine,” Kenanga Research said.

“It is also unclear at this stage as to the financial impact of such a venture, mindful that the government will likely want to see it delivered in the most competitive manner as possible.

“The recent run-up in its share price has rendered current valuation to be unattractive, which seems to have over-priced the positive near-term prospects. The Government has agreed to provide a 25-month interim period for procurement of drugs to Pharmaniaga Bhd after its concession ends on November 30, 2019. “

The interim period from December 1, 2019 to December 31, 2021 is to ensure no supply chain disruption in the supply and distribution of medicines nationwide while an open tender and appointment of a new concessionaire is developed.

However, starting from December 1, 2019, the government has awarded Pharmaniaga a five-year contract extension for logistics and distribution of medicines based on its capabilities and performance.

“We highlight here that PBT margin for logistics and distribution segment is razor-thin, averaging at 0.2 per cent over the past 20 quarters.”

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