Healthcare sector upside to come from regional earnings

Singapore

EVEN though healthcare stocks have broadly underperformed the rest of the market this year, they still trade at premium valuations that ultimately will have to be justified by earnings - mostly from regional expansion.

Based on information compiled by SGX's investor education portal My Gateway as at Friday's close, shares of the 12 listed healthcare providers recorded a year-to-date change in prices of between minus 21.3 per cent and +96 per cent, with Raffles Medical Group posting the biggest drop and International Healthway Corp the highest jump.

This compares with a 12 per cent rise in the Straits Times Index over the same period.

My Gateway's data also showed that the smaller-cap companies, including Singapore Medical Group and Singapore O&G, are trading at price-to-earnings (P/E) ratios of between 35.3 and 24.9 times, while bigger-cap healthcare providers IHH Healthcare Berhad and Raffles Medical Group (RMG) are trading at P/E multiples of 51.7 and 27.8 times respectively. Bloomberg gives the STI as trading at about 11 times earnings.

Persistent premium valuations are led by investors' general view that the sector is more resilient or "recession proof'', given the ever-present demand for healthcare among Asia's rapidly ageing populations and the rise in lifestyle diseases.

Ngoh Yi Sin, analyst at CIMB Securities, said that stocks which outperformed came mainly from some of the smaller-cap players. However, a run-up in the prices of most healthcare stocks is not likely in the near term as Singapore's medical tourism outlook remains soft, she said.

The bigger-cap hospital operators such as IHH and RMG are also expected to face startup costs from their expansion plans in Hong Kong and China, as they look to tap the booming healthcare market there.

Not helping is the rising trend of Singaporeans shifting from private to public healthcare services which adds more pressure on the private sector, said Soh Lin Sin, analyst at Phillip Securities Research. This has prompted private healthcare players including RMG and IHH to seek growth opportunities overseas, she added.

Analysts also point out that healthcare stocks which outperformed this year were largely driven by inorganic growth led by acquisitions or mergers and acquisitions (M&As). As a result, smaller-cap healthcare players could continue to do well if they deliver on their M&A strategy, said CIMB's Ms Ngoh.

DBS Group Research analyst Rachel Lih said: "Share prices that have taken a beating are trading at more attractive levels and are looking more interesting now; however, we believe potential re-rating would be when there is expected recovery in earnings growth."

She added that re-rating catalysts for the sector include a better economic outlook that would improve private healthcare consumption, a possible recovery in medical tourism and new expansions that turn profitable.

Andrew Chow, UOB Kay Hian's head of research, told The Business Times that some healthcare providers have already shifted their focus to specific treatments in areas that are high in billing intensity such as cancer and heart conditions, which could ultimately improve their earnings outlook.

However, even though share prices have fallen, Mr Chow said that "at this stage, healthcare companies are (still) not cheap".

That said, he favours asset-heavy companies RMG and Health Management International (HMI), while his top pick among the asset-light ones is Singapore O&G.

CIMB Securities has placed "add" ratings on RMG, IHH and HMI but said it prefers HMI, which is driven by its proxy to growing medical tourism in Malaysia, less pricey valuations as well as the absence of gestation costs from new hospitals.

Phillip Securities Research's top pick for healthcare stocks is also HMI, which has two hospitals in Malaysia - Mahkota Medical Centre in Malacca and Regency Specialist Hospital in Johor Baru.

"Malacca is a magnet for medical tourism in Malaysia due to its competitive pricing, including accommodation and food costs, compared to regional peers, and we expect Mahkota to benefit from this. Moreover, Malaysia's favourable underlying socio-economic conditions, such as a growing private healthcare insurance market, rising affluence and ageing population, will underpin the long-term growth for private healthcare," said Phillip Securities Research's Ms Soh.

Analysts also noted that HMI is ramping up capacity to cater to rising demand by adding operational beds to each of its hospitals by June next year, bringing total capacity to 500 beds. This is expected to rise to over 800 given that expansion plans are in the pipeline.