2019 Outlook & Strategy ~ Healthcare - DBS Research 2018-11-26: Pressing On For A Better Future

2019 Outlook & Strategy ~ Healthcare - DBS Group Research | SGinvestors.io IHH HEALTHCARE BERHAD (SGX:Q0F) PARKWAYLIFE REIT (SGX:C2PU) SINGAPORE MEDICAL GROUP LTD (SGX:5OT) RAFFLES MEDICAL GROUP LTD (SGX:BSL)

2019 Outlook & Strategy ~ Healthcare - Pressing On For A Better Future

  • Riding out gestation period for future growth.
  • Forex volatility to impact headline earnings.
  • Long-term positive outlook but potential macroeconomic headwinds and cost pressures may moderate near-term growth prospects.
  • Top picks: IHH Healthcare, Singapore Medical Group, and Parkway Life REIT.



Outlook


Short-term pain for long-term gain.

  • The long-awaited new China hospitals of both IHH HEALTHCARE BERHAD (SGX:Q0F) and RAFFLES MEDICAL GROUP LTD (SGX:BSL) are finally slated to open by end-2018/2019 to 2020. Between the two, Raffles Medical will be the first to open Raffles Hospital Chongqing by end-2018, followed by IHH’s Gleneagles Chengdu in 1H19. Both IHH and Raffles Medical will open their Shanghai hospitals by end-2019/2020. 
  • As previously highlighted, this has partially led the market to expect start-up losses and pre-operating costs from the opening of hospitals in China by both IHH and Raffles Medical from 2018 onwards. While we believe in the potential future growth driven by these expansion plans as they begin to unfold in phases over the next 3-5 years, near term earnings growth will continue to be weighed down by start-up costs and pre-operating costs.
  • In addition, IHH finally obtained control over Fortis Healthcare on 13 Nov 2018 after it took a 31.1% stake in Fortis Healthcare. This marks IHH’s accelerated expansion into India. We reiterate our view that while the acquisition may elevate IHH’s position as the second largest hospital operator in India, we would expect integration costs in the near-term as IHH revamps and integrates Fortis Healthcare into the group.

Forex volatility to impact headline earnings.

  • In FY18, IHH has suffered the brunt of the sharp depreciation of the Turkish Lira (TRY) though a large part of the impact is mainly forex translation losses. As the healthcare companies expand overseas (China - RMB and India - INR), forex volatility would impact headline earnings given the macro uncertainties such as trade wars.
  • In addition, strengthening of the USD could potentially impact some costs (consumables are priced in USD), albeit small. For IHH, any further depreciation in TRY will further impact its headline earnings. However, management is taking steps to reduce its translation losses via restructuring of its non-TRY borrowings in Acibadem.


Risks


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 are other risks that could derail earnings growth.

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, costs, taxes and potential risks to unemployment, patients may turn to public healthcare for cheaper alternatives. In addition, growth in medical tourism may remain slow moving.

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


Large-cap healthcare service providers trade at 16x FY19E EV/EBITDA

  • Large-cap healthcare service providers trade at 16x FY19E EV/EBITDA, close to 2 SD below historical average. Large-cap healthcare service providers are trading at 16x FY19F EV/EBITDA, close to 2 SD below historical average. The sector trades at 53x FY19F PE, at historical average, however we expect potential downside risk to earnings from higher costs and if the TRY continues to depreciate.
  • The sector currently trades at attractive levels however, we remain cautious on its near-term growth, that could potentially be moderated by gestation from the opening of new hospitals and brownfield expansion plans. 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 near-to medium-term growth prospects.

Top picks are IHH, Singapore Medical Group and Parkway Life REIT.

  • Our top picks are
    1. IHH HEALTHCARE BERHAD (SGX:Q0F) for its larger size and diversified portfolio that could better cushion the drag from start-up losses and pre-operating costs;
    2. SINGAPORE MEDICAL GROUP LTD (SGX:5OT) on continued growth by recent and potential acquisitions, scaling-up of its businesses, and relatively attractive valuation; and
    3. PARKWAYLIFE REIT (SGX:C2PU) for its steady earnings stream, defensive profile and a beneficiary of potential upward trends in CPI.





Rachel Lih Rui TAN DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2018-11-26
SGX Stock Analyst Report BUY MAINTAIN BUY 6.350 SAME 6.350
BUY MAINTAIN BUY 3.100 SAME 3.100
BUY MAINTAIN BUY 0.730 SAME 0.730
FULLY VALUED MAINTAIN FULLY VALUED 1.000 SAME 1.000





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