Kenanga Research has downgraded IHH Healthcare from MARKET PERFORM to UNDERPERFORM as its share price has exceeded its target price of RM4.38.
The new target price is cut by 10.6 per cent to RM4.20.
In addition, it has downgraded the healthcare sector from NEUTRAL to UNDERWEIGHT.
However, it believes that the healthcare industry in Malaysia will continue to enjoy stable growth supported by the growing healthcare expenditure, rising medical insurance and aging population demographics.
The healthcare services sector is considered defensive for its higher predictability factor and captive earnings streams.
IHH is the world’s second largest listed healthcare operator by market capitalisation and is dual-listed on Bursa Malaysia and Singapore Exchange.
It listed at RM2.85 and the stock has run up by 67 per cent in only two years.
While the brokers believe that the stock is expensive it is also possible that it could face some problems with its business in Turkey.
Investor Central. We keep your investments honest.
IHH operates in Turkey via its 60 per cent stake in Acibadem.
It says Singapore and Turkey remain important hubs for medical tourism.
It has more than 2,000 beds across 17 hospitals, 15 in Turkey and one each in Macedonia and Iraq.
Acibadem is currently expanding three hospitals, namely Acibadem Sistina Skopje Clinical Hospital, Acibadem Bodrum and Acibadem Maslak Hospital.
Acibadem Altunizade, Kartal and Atasehir are all greenfield developments with a total of 550 beds.
According to its 2013 annual report, the Turkish Government is aiming for US$20 billion medical tourism revenues by 2023.
This may be a growth driver for Acibadem in the long run, but tensions in Iraq could still pose a problem in the short term.
Turkey is a neighbour of Iraq and Syria, where Islamic State is fighting government forces.
So, tourists, whether for leisure or medical, may be reluctant to travel to Turkey in the near term.
It recently opened a 210-bed hospital, the Faruk Medical City, west of Kirkuk via a hospital management agreement (HMA).
The area is controlled by the government but it is surrounded by IS controlled areas such as Tikrit, Mosul and Baiji.
So, prospective patients in Iraq would not be able to cross these areas to visit the hospital.
Hence, our question.
With the conflict in that part of the world, it might even have a lot of people flock to it for treatment, and it might have difficulty getting paid for providing treatment.
In view of the humanitarian crisis in that part of the world, getting payment might anyway not be a top priority.
The Government allocated RM22.1 billion for the health sector under operating and development expenditure.
According to Kenanga Research, the allocation is 13 per cent higher than in the previous year.
The allocation will be channelled to programmes and projects, including the construction of Hospital Tanjung Karang and additional blocks for Hospital Jeli, as well as the upgrading of Hospital Kuala Lipis and 30 rural clinics.
The Government has set up 234 so-called “1Malaysia” clinics with 50 additional clinics to be established in 2014.
Other allocations include RM66 million for the purchase of equipment and the construction of additional blocks in Hospital Queen Elizabeth in Kota Kinabalu, RM150 million to appoint 6,800 more nurses and RM3.3 billion for the purchase of medicines and medical equipment.
The Malaysian Health Ministry has increased medical consultation and procedure fees by 14 per cent, the first increase in twelve years.
According to Kenanga Research, the hike has minimal impact to IHH’s bottom line considering that the vast majority of IHH’s specialists in Malaysia are independent doctors.
As such, IHH does not have any meaningful share of their professional fees.
But we’d like to hear it from the company.
We couldn’t find in the annual reports, 2012 and 2013.
In January, it started building the 500-bed Gleneagles Hong Kong Hospital at Wong Chuk Hang, Hong Kong.
The GHK development, a 60:40 venture between Parkway Pantai and NWS Holdings Limited, is expected to open in early 2017, with the University of Hong Kong’s Li Ka Shing Faculty of Medicine as the clinical partner.
This will allow to tap into Hong Kong’s premium healthcare segment.
According to the prospectus released in 2012, IHH did not have any fixed dividend policy.
But in 2013, it introduced a dividend payout of no less than 20 per cent of the Group’s profit.
It recommended 2 sen per share for FY13.
Its cash balance rose from RM1.7 billion in FY12 to RM 2.2 billion in FY13 while long term debt increased from RM3.3 billion to RM4 billion.
Its cash flow from operations dropped slightly from RM1.4 billion to RM1.3 billion during the same period.
So, what motivated the Group to announce a dividend policy just one year after listing?
A new privately-owned healthcare and hotel complex, Connexion at Farrer Park, opened its doors this month.
This new hospital was developed by a group of 22 doctors practising at the Parkway Group’s hospitals, who wanted to set up an independent hospital of their own, along with investments from Indonesia’s fourth richest billionaire Low Tuck Kwong of coal miner Bayan Resources.
According to Maybank Research, Connexion chairman Dr Maurice Choo, a cardiologist, has been quoted in the press as saying that they plan to “disrupt the market” with lower prices.
These doctors presumably didn’t take the decision to leave lightly.
They must have had some serious concerns.
So much so, they organised themselves, and risking their professional reputations started their own company.
Moreover, they managed to persuade an investor to back their project.
This hints at morale and productivity issues at IHH.
Source: Malay Mail Online