High inflation a boon for healthcare plays: DBS

HEALTHCARE plays will likely benefit from periods of high inflation with their ability to pass on higher costs to consumers due to inelastic demand, said DBS Group Research.

In an industry report published Thursday (Aug 18), analyst Rachel Tan noted a moderately positive correlation between Consumer Price Index and the healthcare index, as hospital players outperformed the Straits Times Index during the high inflationary period from 2000 to 2013.

She cited the example of Raffles Medical — as a proxy to healthcare players — noting that the company had recorded higher revenue growth during the high inflation period while earnings before interest, taxes, depreciation and amortisation margin was maintained or increased.

This led her to maintain buy ratings on  IHH Healthcare and Raffles Medical, as she noted the latter’s strong recovery post Covid-19 as well as its ability to raise prices in a high inflation environment.

DBS’s target price on IHH Healthcare’s Malaysian listing was RM7.90 while Raffles Medical had a target price of S$1.64.

However, Tan said that this does not mean that hospital stocks are entirely spared during an economic downturn, despite the general perception that healthcare is typically more resilient.

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“While healthcare is a ‘necessity’, private healthcare spending could be seen as a ‘luxury’ during challenging economic conditions,” she said.

On Thursday, shares of Raffles Medical traded at S$1.36, 0.7 per cent or S$0.01 higher, while IHH Healthcare was flat at S$2.02 as at 2.49 pm.