Analyst says Malaysian healthcare stocks attractive but catalysts not enough

KPJ Healthcare is UOB’s top pick due to its ability to exit loss-making businesses.

The Malaysian healthcare sector offers attractive earnings growth and valuations although a lack of compelling catalysts may limit the market’s upside potential, according to brokerage firm UOB Kay Hian Research. 

UOBKH analyst Philip Wong maintained their “market weight” rating for Malaysian healthcare-related stocks and assigned an “overweight” rating for the near term due to the cheap valuations and earnings growth potential of hospital stocks, which is largely driven by a single player, KPJ Healthcare.

“Given the bargain valuations and attractive earnings growth, we maintain tactical overweight on the sector, in line with our broad market strategy to remain defensive in 2H23,” Wong said in a report dated 19 June. “But as risk appetite improves beyond that, the sector recommendation reverts to a market weight.”

The analyst picked KPJ as their top pick mainly due to its ongoing efforts to divest its loss-making operations in Australia and Indonesia. Earnings of the hospital operator are also estimated to surge 60% this year to drive the entire hospital subsector’s projected earnings growth of 19%.

Wong said KPJ has continuously outperformed its peers with a 17% gain year to date, compared to lower returns delivered by its rivals as IHH Healthcare saw returns dip 1.3% year to date while that of Duopharma has declined 15%.

The ongoing divestments will leave KPJ with its nursing college in Bangladesh as the only loss-making regional asset, according to UOBKH.

Another notable player is the fast-growing Sunway Healthcare, the healthcare unit of Malaysian conglomerate Sunway Bhd backed by Singapore’s sovereign wealth fund GIC. 

Wong said Sunway Healthcare seems to be the most aggressive in expansion with nearly 2,000 additional beds planned across six new hospitals, compared to KPJ’s target of boosting its capacity by another 1,000 beds and IHH’s goal to add 600 beds over the next few years.

“Emerging competition within the hospital space is shielded by company-specific moats and influx of beds should be well absorbed by structural long-term trends,” Wong said.