PETALING JAYA: The healthcare industry is expected to tap into medical tourism dollars to prop up its growth rates and has the potential to grow from the current low base.

According to RHB Research in its report yesterday, the top-two listed hospital operators see medical tourism currently accounting for less than 10% and 5% of IHH Healthcare Bhd and KPJ Healthcare Bhd’s revenue, respectively.

The segment’s contribution could rise moving forward, as the research house expects this proportion to increase with the opening of new hospitals in strategic locations across the country.

RHB healthcare analyst Alexander Chia said in the report that valuations for the sector continued to be demanding with no meaningful re-rating catalysts in store, especially for the smaller players.

“However, we believe that the healthcare sector remains a draw, given its defensive nature and attractive long-term growth prospects post the expansion of the major healthcare players,” Chia said.

Chia noted that there were earnings improvements seen for major healthcare players in the third quarter, including IHH and KPJ, due to the increase in inpatient admission numbers and revenue intensity per patient despite it being a traditionally weaker quarter.

“IHH and KPJ registered a 10.4% and 26.4% increase, respectively, in terms of inpatient admissions against the corresponding period last year, while revenue per inpatient grew by 7.8% and 4.9%, respectively, during the same time frame,” he said.

Chia rated the sector as a “neutral” due to its generally high valuations. He further chose Faber Group Bhd and KPJ with target prices of RM3.35 and RM3.67, respectively, as its top picks for the sector.

KPJ, which is trading at 25 times FY15 forecast (FY15F) price-to-earnings ratio (PER) is a cheaper proxy to the healthcare sector when compared with IHH’s 32.3 times PER.

“In addition, KPJ offers a higher dividend yield of 2.2% in FY15F versus IHH’s 0.8%. We expect the former to deliver a higher FY15F and FY16F return on equity (ROE) of 11.9% and 12%, respectively,” RHB said.

KPJ is also shielded from external volatilities in foreign currency exchange, given that 90% of its revenue is locally derived.

Meanwhile, IHH was trading at 32.3 times PER and its recent third-quarter performance was impacted by the weakening Turkish lira and Singapore dollar against the ringgit.

Chia’s rating for Faber was upgraded to a “buy” from a “neutral” despite recent earnings that came in below street expectations, following a recent results briefing.

Faber will now be factoring in the upward revision in its earnings forecast, which include a robust pipeline of projects, strong recurring revenue and a 4.2% FY15F dividend yield, with an estimated 22.6% ROE next year, he said.

The company also recently completed its related acquisitions of Projek Penyelenggaraan Lebuhraya and Opus Group.

Meanwhile, RHB maintained its earnings forecast for Hovid, as the latter’s improved quarter-on-quarter earnings of RM5.7mil netted in the first quarter of FY15 was due to the deferred sales from the previous financial year on capacity constraints.

Chia downgraded his rating on Caring Pharmacy Group Bhd to a “sell” from a “neutral” on the second consecutive quarter of disappointing earnings due to the poor performance of new outlets and higher operating expenditures.

“The earnings downgrade was based on the lower revenue assumption for new outlets of RM2mil per outlet annually (from RM2.8mil), higher advertising and marketing costs, and increasing personnel costs,” he wrote.

source:The Star