Upbeat outlook for health industry on rising demand

PETALING JAYA: UOB Kay Hian Research (UOBKH Research) has upgraded the Malaysian healthcare sector to “overweight,” citing a combination of compelling valuations, strong earnings momentum and “diminishing policy risk” – with KPJ Healthcare Bhd and Duopharma Biotech Bhd flagged as top picks.

In a sectoral update report, the research house said the industry’s earnings are “highly defensive yet attractive, against a backdrop of diminishing policy risk.

“The sector is also supported by structural positives, robust rollouts and resilient domesticated demand,” it said.

UOBKH Research noted that the hospital segment, in particular, stands out with an earnings growth forecast of 15.1% this year.

This, it said, is against a backdrop of valuations that are currently trading one standard deviation below the sector’s five-year mean price-to-earnings ratio.

It also sees margin tailwinds as both IHH Healthcare Bhd and KPJ are in the early stages of brownfield expansions.

“These positives far outweigh diminishing policy risk,” it said.

Beyond hospitals, UOBKH Research also highlighted non-hospital plays such as Alpha IVF Group Bhd and Duopharma Biotech Bhd for their respective growth drivers. “Alpha IVF is undertaking exciting regional expansion while Duopharma is expected to see a sharp input cost-led recovery in 2025.”

On the policy front, UOBKH Research does not anticipate major disruptions from the planned introduction of a diagnosis-related group (DRG) payment model by year-end, which will initially apply to a “limited set of simple medical conditions”.

“As a fixed-rate payment model, DRG represents a shift towards value-based care – a direction private hospitals are already moving towards.

“Hence, we do not expect future DRG rollouts to significantly disrupt the operating landscape,” it said.

The research firm also downplayed the potential impact of the new drug price transparency rule for private healthcare facilities.

“We believe the drug price display mandate is unlikely to deter patients from purchasing medications directly from their doctors.

“A more impactful measure would be dispensing separation – where doctors prescribe and pharmacists dispense – but this has yet to be formally considered by the Health Ministry.”

Similarly, the research house expects “minimal” impact from the 6% sales and service tax (SST) on private healthcare services for foreigners, which takes effect from July 1, 2025.

“The overall impact is expected to be minimal, as foreign patient revenue accounts for approximately 6% of KPJ’s and 1% of IHH’s total revenue.

“While foreign patients contribute around 50% of Alpha IVF’s revenue, its niche in offering specialised, high-end in vitro fertilisation treatments suggests that demand will likely remain resilient despite the SST expansion.”

UOBKH Research named KPJ and Duopharma as its top picks, “driven by the former’s multitude of levers to drive robust earnings growth and the latter’s expected cost-led recovery in 2025”.

“In summary, attractive earnings growth, compelling valuations and ongoing positive structural changes support our ‘overweight’ rating for the healthcare sector.

“In addition, the sector is highly defensive, insulated from external trade that is at risk of a global economic slowdown.”