Healthcare Sector - DBS Research 2016-12-14: 2017 Outlook ~ Healthy growth prospects

Healthcare Sector - DBS Vickers 2016-12-14: 2017 Outlook ~ Healthy growth prospects Market Outlook 2017 Healthcare Sector

Healthcare Sector - 2017 Outlook ~ Healthy growth prospects

  • Expansion plans unfolding in phases, driving medium-term growth.
  • M&A and ‘corporatisation’ of medical practices could continue.
  • Long-term positive outlook but potential macroeconomic headwinds and cost pressures may moderate near-term growth prospects.
  • Top picks: IHH Healthcare, Singapore O&G, and Parkway Life REIT.



Outlook


Expansion plans unfolding in phases, driving medium-term growth. 

  • While revenue growth (among the large cap healthcare service providers) in 2016 has remained resilient (partly due to acquisitions and contributions from new hospitals), earnings growth was weighed down by start-up costs and pre-operating costs of expansion plans, both in home markets and new markets. 
  • We expect these expansion plans would begin to unfold in phases over the next three to five years, starting in 2017. IHH is expected to open three new hospitals in HK, China and Turkey and the Raffles Hospital Extension is expected to complete by mid-2017. 
  • While we believe these expansion plans will drive medium-term growth, near-term earnings growth could remain subdued.

M&A and the ‘corporatisation’ of medical practices could continue. 

  • In recent years, we have seen a series of M&As and listings of new healthcare companies, especially among the smaller cap healthcare service providers. The sector has performed strongly, rising 24% year-to-date vs STI’s 2.1%, led by selective smaller cap healthcare service providers. 
  • We believe ‘corporatisation’ of medical practices could continue following the successful listings of a few medical practices and acquisition transactions.


Risks


Macroeconomic headwinds. 

  • While healthcare demand is seen as resilient and defensive in the midst of macroeconomic uncertainties, private healthcare demand is not fully sheltered from macroeconomic headwinds. With expectations of rising interest rates and potential risks to unemployment, patients may turn to public healthcare for cheaper alternatives. 
  • In addition, growth in medical tourism may remain slow-moving.

Higher than expected start-up / pre-operating costs. 

  • Following China’s healthcare reform, we have seen an interest especially from the larger cap healthcare companies to expand into China. While the market is promising, the operating environment of private healthcare is relatively uncertain with the possibility of longer than expected period to stabilise the operations. Higher than expected start-up / pre-operating costs is another risk that could derail earnings growth.

Potential pressure to manage healthcare cost inflation. 

  • As healthcare is seen as a social good, there could be potential political pressure to manage healthcare cost inflation.
  • Following recent concerns from insurance service providers and industry stakeholders, the Singapore government conducted a study and has published guidelines to manage healthcare cost inflation. While there have not been any major changes to the healthcare system and regulations on private healthcare, potential pressure from stakeholders may change the ‘landscape’ of private healthcare sector in the longer term.


Valuation & Stock Picks


Sector trades at 43x FY17 PE, close to historical average. 

  • The sector trades at 43x FY17 PE, close to historical average. The sector continues to trade at a premium to market, currently at 3x premium (historical average). Large cap healthcare service providers are trading at 24x FY17 EV/EBITDA, marginally below the higher end of the historical range. 
  • While we are positive on the long term prospects of the healthcare sector driven by an ageing population and growing affluent society in Asia, we are selective on our stocks and prefer those with good medium term growth prospects.

Top picks are IHH, Singapore O&G and Parkway Life REIT.  

  • Our top picks are 
    1. IHH as its medium term growth potential is led by Gleneagles HK and its pipeline of new hospitals; we would look to buy the shares on any share price weakness; 
    2. Singapore O&G amongst the smaller cap healthcare for its specialised focused on women’s health; and 
    3. Parkway Life REIT for its steady earnings stream and defensive profile.




Rachel TAN DBS Vickers | Andy SIM CFA DBS Vickers | http://www.dbsvickers.com/ 2016-12-14




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