New healthcare listings get a check-up

THE listings of companies in healthcare seem to attract a fair bit of attention because the market tends to ascribe the sector with high valuations.

This is because healthcare businesses have growth potential in South-East Asia markets despite high entry barriers.

A close examination of the seven healthcare-related companies, that were listed in the last five years, reveals that almost all of them came to the market at high valuations ranging from 21 times to 35 times their last full year (FY) earnings.

The exception was Optimax Holdings Bhd, an eye specialist service provider, which was listed in 2020 at 30 sen – priced at a historical price-to- earnings (PE) multiple of only 10.3 times earnings. The stock now trades at a much higher PE multiple of 25 times.

While some have lived up to their high expectations of growth, several have failed to deliver on that while others are seeing declining earnings.

Two outliers from this basket of stocks are Optimax and UMediC Group Bhd, a medical device maker.

For Optimax, analysts are bullish on the stock, which is up 93% since its initial public offering (IPO).

Bloomberg data shows the five research houses covering the stock have “buy” calls with a consensus target price of 84 sen.

However, Optimax has seen five quarters of year-on-year declining bottom line numbers prior to its latest quarter which showed a modest recovery.

Analysts note that Optimax is poised to see higher eye surgery numbers coupled with a reduction in costs, as it has completed most of its expansion. Optimax has opened new facilities and expanded abroad.

Meanwhile, medical device maker UMediC has seen its share price hit a record high of 86 sen in April 2023. It was listed at 32 sen a share in 2022. The stock is hovering around 58 sen, giving it a toppish PE of 31 times.

Since its listing, at a PE multiple of 23.5 times, the company has been reporting uneven earnings growth.

Hong Leong Investment Bank (HLIB) Research, the only research house that covers the stock, has a “buy” call with a target price of 88 sen from RM1.04 previously. UMediC manufactures medical devices such as humidifiers (which are used in oxygen therapy for hospital patients) and inhalers.

HLIB Research reckons that growth will be supported by an increase in orders coupled with a potential new income stream from its new aged care facility in Batu Kawan, Penang.

Meanwhile, Alpha IVF Group Bhd stands out due to its huge market capitalisation of RM1.5bil. Listed last March, it is founded by fertility expert Datuk Dr Colin Lee Soon Soo. The company saw a massive issuance of owner shares worth RM348.8mil that went to its founders including Dr Lee. The company raised RM466.5mil from its IPO.

UOB Kay Hian (UOBKH) Research is bullish on the stock, giving it a target price of 40 sen on the basis of its growth story.

It is of the view Alpha IVF warrants a 20% premium against its peers underpinned by its leading clinical success rates, superior profit margins and international expansion.

The share price of Alpha IVF has remained unchanged since its IPO last March, possibly stemming from its high PE valuation of 29.2 times.

Nonetheless, the company has demonstrated relatively consistent growth in the four quarters of earnings it has posted so far.

Stocks like Cengild Medical Bhd and DC Healthcare Holdings Bhd are having a harder time convincing the market of their growth potential, with earnings volatility and weaker share price performance.

Cengild, an independent medical centre specialising in gastrointestinal and liver diseases, trades at 28 sen, 15% lower than its offer price of 33 sen when it listed in 2022.

The group has been posting choppy quarterly earnings, mainly due to lower patient volumes and a decrease in the number of endoscopic procedures and surgeries performed, along with higher employee and depreciation costs.

Cengild executive chairman Datuk Dr Tan Huck Joo tells StarBiz 7 that quarterly results may not be a good indicator of the company’s medium-to-long-term prospects.

“The group’s revenue has increased year-on-year since its inception, except for a slight contraction of about 5% from FY23 to FY24,” he says.

He notes that earnings are impacted by accelerated depreciation stemming from the hospital’s relocation to a new medical centre. The company is forking out RM122.34mil for a 17-storey building near its current location in Bangsar South, Kuala Lumpur.

However, that acquisition seems to go against the group’s asset-light strategy.

In response, Tan says the move to buy the building works out to be more cost effective, considering that Cengild is paying RM2mil per year for leasing its premises.

With rental rates rising and the hospital needing to expand, that rate could hit some RM6.5mil a year. He adds that the interest costs to finance the acquisition are lower than the rental rates the company needs to pay.

As for DC Healthcare Bhd, an aesthetic medical services provider, it has been posting net losses since its third quarter of 2023.

One of the reasons is that despite the company seeing a growth in the sale of its packages, the actual redemption rate remains low. It has also been incurring higher administrative and marketing costs.

The unredeemed prepaid packages of the company have grown to RM15.89mil compared with RM3.71mil previously.

In written replies to StarBiz 7, DC Healthcare managing director Dr Chong Tze Sheng notes: “Over time, as customers utilise their prepaid treatments, revenue recognition will improve, aligning with the company’s long-term growth strategy.”

Prepaid packages that remain unused upon expiry will be recognised as revenue.

Given that DC Healthcare was listed in 2023, IPO proceeds should have been sufficient to support the increase in costs incurred by the company.

Chong maintains that the losses sustained from the expenses are short-term, which are expected to stabilise as new clinics mature and patient volumes increase.

“We remain confident in our ability to return to profitability, supported by a growing market presence, operational efficiencies, and sustained demand for medical aesthetic services,” he says.